Using accounting-based (residual income) valuations, this study examines the
extent to which abnormal returns after insider share trades are explained by private information
versus mispricing of public information. For a sample of insider trades in the Netherlands (1999-
2008), I find that managers’ share purchase decisions are associated with positive future
abnormal returns as well as equity undervaluation. Even though undervaluation results in
predictable price increases, positive abnormal returns following purchases persist after
controlling for fundamental valuations. Thus, this study provides evidence on the sources of
managers’ personal trading gains and suggests that positive abnormal returns after insider share
purchases reflect both private information and managers’ responses to market mispricing of
public information