Melbourne Accounting Research Seminar - Daniel Beneish

Professor Daniel Beneish from Indiana University will present a MARS seminar.

Topic: How do Insider Purchases Inform?

Abstract: The short answer is indirectly and ambiguously. Indirectly, because insider purchases are too
infrequent to affect prices in the manner contemplated in Kyle-like models. Ambiguously,
because investors have to bear further processing costs both to distinguish routine from
information-motivated purchases, and to assess which of the latter are credible. Our central
premise is that open market purchases convey insiders’ positive private information when
investors can plausibly infer that risk-averse, under-diversified insiders are willing to bear
higher personal risk. Consistent with predictions, we find that purchases are more frequent and
informative in firms with higher risk, in firms that experience riskier circumstances, and in firms
where insiders’ are exposed to higher risk because of their ownership and compensation contracts.
Purchases are also less informative when preceded by sales, as these convey a mixed signal about
changes in insider risk-bearing. Our findings explain a substantial portion of the variation in the
incidence of purchases and suggest that purchases are likely to occur when they signal an increase
in insider wealth risk, but not when they do not. They are consistent with a risk and asymmetry
view of purchases where asymmetry is necessary, but not sufficient for insider purchases to occur.

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