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"The Signal To Buy" Equity Strategy

Why Follow Corporate Insiders?

It is difficult to argue the fact that corporate insiders of publicly traded companies have more information on their own company than any external shareholders. Corporate Insiders, by definition, include corporate officers (CEO’s, CFO’s, etc.) members of the board of directors, and any beneficial owner of more than 10% of a class of the company’s equity securities. As such, insiders have a unique trading advantage and have been capitalizing on their privileged status for years. It is important to note that it is not illegal for insiders to trade based on their long term outlook.

There have been countless academic studies of legal insider trading over the years that unanimously show that insiders are indeed better informed and earn abnormal returns: Jaffe (1974), Finnerty (1976), Seyhun (1986, 1998), Rozeff and Zaman (1988), Lin and Howe (1990), and Jeng, Metrick and Zeckhauser (1999).

The Playing Field Gets Leveled

Since the 1970’s, the SEC has published monthly data on the purchases and sales of corporate insiders. However, on July 30, 2002 the Sarbanes Oxley Act was signed into law requiring corporate insiders to inform the public of their purchases, sales, or intention to sell within 48 hours of doing so from the previous 40 day window. This single piece of legislation essentially closed the information gap between privileged corporate insiders and individual investors.

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