UC Berkeley

I investigate whether managers obtain and exploit private information about who is buying and selling their firm’s securities. To do so, I examine insider trading prior to activist investors’ disclosure of Schedule 13Ds. Schedule 13Ds are required when investors have acquired more than 5% of a firm’s shares, and they cause a significant price jump of approximately 6% upon disclosure. I find that insider purchases (sales) are abnormally high (low) in the days prior to the disclosure of Schedule 13Ds. Cross-sectionally, pre-disclosure insider purchases are higher when activist investors make larger trades, since they are more likely to be detected by insiders. Furthermore, the stock market fails to recognize that insiders trade ahead of the Schedule13D filings, reflected by the fact that pre-disclosure insider trading does not facilitate price discovery in the underlying firms. Finally, I show that pre-disclosure insider trading is predictive of the firm’s future stock and operating performance, consistent with managers exploiting private information when they expect it to generate greater profits. Taken together, my results show that managers obtain private information concerning their firm’s investor base and exploit it for personal gain.