A study published in the Journal of Finance explored the value of insider information. The authors examined the performance of insider trading on the Oslo Stock Exchange for the period 1985-1992. At the time, the Oslo market was considered an insider's market, and this particular time period was one of lax insider trading oversight. The authors found no evidence of abnormally high insider returns, and also found that returns were zero or negative as compared to the market, even before considering transaction costs and taxes.
If corporate insiders, with knowledge that the market supposedly doesn't possess, can't outperform in an "inefficient" overseas market like Norway, how can individual investors or portfolio managers hope to do so in the more efficient U.S. markets?
There's another reason that knowledge of insider trading activity isn't likely to prove of value. Access to information about corporate insider trading activity was once limited to institutional investors. Thanks to the Internet, such information is readily available and can be had at little or no cost. Because the information is so readily available, it's very difficult (if not impossible) to gain any competitive advantage from it. Charles Albers, who used to run Oppenheimer's Main Street funds, noted two such instances.
- First, looking at insider trading worked until the mid-80s, when such information became worthless as more investors began looking at the same data.
- Second, Albers noticed patterns regarding companies doing secondary share offerings and used that in his screening process. Unfortunately for Albers, academics soon started publishing research on the phenomenon, and it became less effective. Excess profits breed competition, rapidly eliminating the excess profits.