Deniz Anginer from the Simon Fraser University (et. al.) in Canada took a look at corporate insiders’ dealing from January 2017 to April 2020 to see if this activity can predict how COVID-19 might affect the longer term economic performance of economies in which these managers operate?
They studied individuals in the U.S., Canada, China, Italy, Spain and South Korea and discovered a marked degree of prescience in dealing earlier this year. Prescience that is in terms of how these insiders’ trades matched up with subsequent stock price performance.
There was detectable but small selling in January and February but the big move was into stocks in March when record amounts of buying occurred. Stock prices, as we now know, have done spectacularly from then so kudos to the insiders.
Curiously the outlier is China. This may have been because stock price declines there were more muted (especially big buying occurred in Italy and Spain where stocks were extremely weak) or, I suspect, it may be because SOE managers have less of a close connection to stock prices of the enterprises they’re managing?
As interesting as this work is I have a problem with one of the academics’ key conclusions i.e. “The message from insider trading is that COVID-19 is having a serious negative impact on the US and world economies, but the magnitude of the disruption is likely to be limited and the duration is likely to be rather short.” Er, if only.
Insiders may have played their companies’ stocks prices well but the big assumption the academics are jumping to is that stock prices are a reliable harbinger of future economic activity. Well, sometimes they are; but other times not.
What is clear from the study is that in times of major market dislocation, especially to the downside, information on insider activity (most of it in the public domain) has great value. We should all pay closer attention in future.
Whether that buying earlier this year turns out to be a correct shorthand for longer-term economic prospects though will, as academics themselves are often fond of saying, require more time and further study to determine.
You can access the paper in full via the following link Insider Trades During COVID-19.
Happy Sunday.