Archive for July 29th, 2009

From the ‘Inside’ Looking Out

Wednesday, July 29th, 2009

“Executives are always trying to sell you on their companies when you talk to them,” says Gina Moore, portfolio manager at a Philadelphia investment firm, in the current issue of BusinessWeek. “Insider transactions signal where they really think the company is going without the corporate spin.” Author Lewis Braham goes on to discuss various ways to profit from watching insider’s buying and selling transactions.

Smeal’s Steve Huddart, KPMG Professor of Accounting, offers additional techniques and insight into the world of insider trading:

A different technique not mentioned in the article is to interpret carefully the insider filings of a company an investor is already following. For instance, the filing may disclose whether the trade is a planned trade that is undertaken within a so-called 10b5-1 plan.

Surprising research by Alan Jagolinzer, who graduated from Smeal in 2004 with a Ph.D. in accounting and is now on the faculty of Stanford University, shows that these planned trades predict future stock movements better than trades made outside of such plans.

As another example, trades are sometimes accompanied by a press release in which the company describes the reasons why the insider is trading. Many trades are for reasons that have much to do with the insider’s personal financial objectives and little or nothing to do with the company’s prospects. The disclosed reason is never as explicit as “the CEO is selling because he thinks the company’s prospects are in the toilet,” but each reader of the press release is free to form his own opinion of the explanation offered for the transaction. The absence of an explanation for a big transaction might also be revealing.

Tags: Accounting, Huddart, Insider Trading
Posted in News | No Comments