Three Essays on Insider Trading

This thesis investigates corporate insider trading in U.S.-listed firms from the perspectives of trading direction, exogenous shocks, and director foreignness. Specifically, the first essay examines the predictive power of aggregate purchase direction on future stock returns. A novel directional measure, Purchase Direction (PD), is developed to quantify the proportion of insiders who purchase shares among all insiders who trade. The findings reveal that PD outperforms the traditional Net Purchase Ratio (NPR) in forecasting future stock returns. This suggests that who trades provides more valuable insights into the information content of insider trading than how much do they trade.
The second essay investigates the effect of exogenous shocks on insider trading profitability. Using the period around the announcement of the largest infrastructure investment plan in U.S. history, the Bipartisan Infrastructure Law (BIL) of 2021, as a quasi-natural experiment, the study finds that insider trading profitability increased following the announcement of the BIL. The findings are consistent with the attentive hypothesis, suggesting that insiders profit from stock trading by leveraging public information. A series of heterogeneity tests further confirm that the results are driven by the use of public information, rather than by random factors or an alternative explanation involving private information obtained through government networks.
The third essay explores the impact of nationality on insider trading profitability. Based on social identity theory, the study finds that foreign directors of U.S.-listed firms face informational disadvantages due to their foreign nationality, which restricts their access to private information from domestic colleagues, ultimately leading to lower trading profitability. A series of heterogeneity tests further confirm that the results are driven by the information channel, rather than by the alternative explanation that foreign directors are less willing to exploit private information.