The Dollar Profits to Insider Trading

We show that there is systematic variation in dollar profits corporate insiders make from their transactions. While prior research documents large returns to insider trading, dollar profits are economically insignificant for a typical insider. The median insider in our sample earns marketadjusted profits of $44. Surprisingly, insiders in well governed companies realize much higher profits, both in dollar terms and as a fraction of their total compensation, even though such insiders do not earn higher percentage returns than insiders in poorly governed companies. We argue that this behavior is consistent with insiders rationally trading off the economic benefits of their information and the risk of being investigated for insider trading. We also show that for some insiders dollar gains from trading are a meaningful fraction of their compensation, and that insiders persistently generate positive and large dollar profits from their trades. For example, the 75th percentile of insiders’ trading gains accounts for 8% of their total compensation, suggesting that for at least some insiders trading profits are an economically important source of private benefits.