Can Retail Investors Learn from Insiders?

This paper examines the trading patterns of retail investors following insider trading and the corresponding price impact. Retail investors follow the opportunistic purchases by insiders, but not their routine purchases. The abnormal retail downloads of the Form 4 filings from the EDGAR database also increase for opportunistic insider purchases. Neither investor attention nor common information such as earnings announcements or analysts forecast revisions explains the results. Moreover, for stocks with opportunistic insider purchases, those that retail investors bought yield higher cumulative abnormal returns than those that retail investors sold. The effect is mostly driven by the information component of the retail trades, rather than liquidity provision or temporary price pressure, and stronger for stocks with greater informational uncertainty and higher arbitrage costs. Variance ratio tests also suggest price efficiency improvements for stocks bought by retail investors following opportunistic insider purchases. The evidence is mostly consistent with retail investors learning from opportunistic insider purchases, and their trading helping expedite price discovery