Trading Ahead of Barbarians' Arrival at the Gate : Insider Trading on Non-Inside Information

This paper formalizes a novel form of corporate insider trading based on non-insider information. In our model, insiders make trading decisions in anticipation of activist intervention. Because insiders have access to private information about firm fundamentals, they can better separate activism-motivated trades from those by speculators based on signals about firm fundamentals. We validate this prediction empirically by showing that when activists (privately) accumulate shares ahead of Schedule 13D filings, insiders are less likely to sell shares and are more likely to buy shares. Consistently with the proposed mechanism, insiders respond to activist trading more decisively precisely when there is an absence of positive news about the firm’s fundamentals---so that insiders are able to attribute high buy order flow to activist interest instead of speculation on positive fundamentals