The Profits to Insider Trading: A Performance-Evaluation Perspective

This paper estimates the profits to insiders when they trade their company's stock. We construct a rolling purchase portfolio' that holds all shares purchased by insiders over the previous year and an analogous sale portfolio' that holds all shares sold by insiders over the previous year. We then analyze the returns to these value-weighted portfolios using performance-evaluation methods. This approach allows us to study the returns to insider transactions beginning on the day after their execution, and is free of the statistical difficulties that plague event studies on long-horizon returns. Using a comprehensive sample of reported insider transactions from 1975 - 1996, we find that the purchase portfolio earns abnormal returns of about 40 basis points per month, with about one-sixth of these abnormal returns accruing within the first five days after the initial transaction, and one-third within the first month. The sale portfolio does not earn abnormal returns. Our portfolio-based approach also allows for straightforward decompositions of the purchase and sale portfolios by various characteristics. We find that the abnormal returns to insider trades in small firms are not significantly different from those in large firms, and that top executives do not earn higher abnormal returns than do other insiders.

Incentives vs. Control: An Analysis of U.S. Dual-Class Companies

Dual-class common stock allows for the separation of voting rights and cash flow rights across the different classes of equity. We construct a large sample of dual-class firms in the United States and analyze the relationships of insider's cash flow rights and voting rights with firm value, performance, and investment behavior. We find that relationship of firm value to cash flow rights is positive and concave and the relationship to voting rights is negative and convex. Identical quadratic relationships are found for the respective ownership variables with sales growth, capital expenditures, and the combination of R&D and advertising. Our evidence is consistent with an entrenchment effect of voting control that leads managers to underinvest and an incentive effect of cash flow ownership that induces managers to pursue more aggressive strategies.

Estimating the Returns to Insider Trading

This paper estimates the returns to insiders when they trade their company’s stock. We first construct a rolling "purchase portfolio" that holds all shares purchased by insiders for a six-month period, and an analogous "sale portfolio" that holds all shares sold by insiders for six months. The six-month horizon is chosen to coincide with the "short-swing" rule of the Securities and Exchange Act of 1934; a rule that prohibits profit-taking by insiders for offsetting trades within six months. We then employ performance-evaluation methods to analyze the returns to the purchase and sale portfolios. This approach yields a proxy for the value-weighted returns to insider transactions beginning on the day after their execution and avoids the statistical difficulties that plague event studies on long-horizon returns. Our methods are designed to estimate the returns earned by insiders themselves and thereby differ from the previous insider-trading literature, which focuses on the "informativeness" of insider trades for other investors. Using a comprehensive sample of reported insider transactions from 1975-1996, we find that the purchase portfolio earns abnormal returns of more than 50 basis points per month. About one-quarter of these abnormal returns accrue within the first five days after the initial transaction, and one-half accrue within the first month. The sale portfolio does not earn abnormal returns. Our portfolio-based approach also allows for straightforward decompositions of performance by various characteristics; we find that the abnormal returns to insider trades in small firms are not significantly different from those in large firms, and that top executives do not earn higher abnormal returns than do other insiders.

Development of a color display capability

Color display capabilities for digital computer

Corporate Governance and Equity Prices

Corporate-governance provisions related to takeover defenses and shareholder rights vary substantially across firms. In this paper, we use the incidence of 24 different provisions to build a 'Governance Index' for about 1,500 firms per year, and then we study the relationship between this index and several forward-looking performance measures during the 1990s. We find a striking relationship between corporate governance and stock returns. An investment strategy that bought the firms in the lowest decile of the index (strongest shareholder rights) and sold the firms in the highest decile of the index (weakest shareholder rights) would have earned abnormal returns of 8.5 percent per year during the sample period. Furthermore, the Governance Index is highly correlated with firm value. In 1990, a one-point increase in the index is associated with a 2.4 percentage-point lower value for Tobin's Q. By 1999, this difference had increased significantly, with a one-point increase in the index associated with an 8.9 percentage-point lower value for Tobin's Q. Finally, we find that weaker shareholder rights are associated with lower profits, lower sales growth, higher capital expenditures, and a higher amount of corporate acquisitions. We conclude with a discussion of several causal interpretations.

Institutional Investors and Equity Prices

We analyze institutional investors' preferences for stocks and the implications that these preferences have for stock-market prices and returns. We find that -- a category including all managers with greater than $100 million under discretionary control -- have nearly doubled their share of the common-stock market from 1980 to 1996 most of this increase driven by the growth in holdings of the largest one-hundred institutions. Large institutions, when compared with other investors, prefer stocks that have greater market capitalizations, are more liquid, and have higher book-to-market ratios and lower returns for the previous year. We discuss how institutional preferences, when combined with the rising share of the market held by institutions, induce changes in the relative prices and returns of large stocks and small stocks. We provide evidence to support the in-sample implications for prices and realized returns and we derive out-of-sample predictions for expected returns.

YPFS Lessons Learned Oral History Project: An Interview with Steven H. Kasoff (1 of 2)

Suggested Citation Form: Kasoff, Steve. “Lessons Learned Interview. Interview by Andrew Metrick, Rosalind Wiggins, and Matthew Lieber. Yale Program on Financial Stability Lessons Learned Oral History Project. 11 November 2020. Transcript. https://ypfs.som.yale.edu/library/ypfs-lesson-learned-oral-history-project-interview-steve-kasoff-

YPFS Lessons Learned Oral History Project: An Interview with Steven H. Kasoff (2 of 2)

Suggested Citation Form: Kasoff, Steve. “Lessons Learned Interview. Interview by Andrew Metrick, Greg Feldberg, Rosalind Wiggins, and Matthew Lieber. Yale Program on Financial Stability Lessons Learned Oral History Project. November 20, 2020. Transcript. https://ypfs.som.yale.edu/library/ypfs-lesson-learned-oral-history-project-interview-steve-kasoff-