Do Insiders Trade on Innovation?

Document Type

Article

Source of Publication

Journal of Contemporary Accounting & Economics

Publication Date

12-1-2022

Abstract

We find that pure insider share purchases—which we define as insider purchases over two successive years without any corresponding sales—are a strong predictor of a firm’s patent applications. The predictability increases with the quality of the patent: Applications for the highest-quality, breakthrough patents increase by 21% in the year following pure insider purchases in our sample. These purchases are associated with large abnormal stock returns of 1.1% per month (14% annualized) over the subsequent three-year period. We also document that stock price responds less to the subsequent announcement of the grant of patent if the application for the patent has been preceded by pure insider purchases, consistent with the idea that insider purchases reveal information about future firm innovation. Our evidence has implications for understanding insider trading within technology companies that have become a dominant feature of US stock markets in recent decades.

ISSN

1815-3298

Publisher

Elsevier BV

First Page

100350

Last Page

100350

Disciplines

Business

Keywords

Insider trading, Innovation, Abnormal stock returns, Patents

Indexed in Scopus

no

Open Access

no

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