Over the past several decades, a growing body of research has investigated the behavior of corporate insiders and their dealings in their own company’s stock. Like all investors, insiders want to maximize their own profits. They also want to avoid regulatory action against them. Despite often complex regulation, many avenues remain for insiders to benefit from their privileged information access.

Many jurisdictions however now require insider transactions to be published, often within one or two days. For outside investors, this raises the question of how those published transactions can be transformed into a useful investment signal. While there is no single playbook, the academic literature offers some starting pointers.

Not all insider trades are informative

The first insight is that many insider trades are simply not informative. In Decoding Inside Information, researchers Lauren Cohen, Christopher Malloy and Lukasz Pomorski observed that insiders trade for all sorts of reasons — to diversify, to raise cash, or because a company discount plan makes buying attractive in the same month every year. Consider an executive who every April sells a fixed amount of stock — those transactions tell us nothing about the state of the company.

The authors dubbed this routine trading, and separated it from opportunistic trading — trades that break an insider's own established pattern. A portfolio strategy that focused only on the opportunistic traders earned value-weighted abnormal returns of roughly 82 basis points per month in their sample, while the trades of routine insiders were associated with returns indistinguishable from zero.

In the US, insiders who file transactions disclosures with the SEC must indicate whether their transactions are pre-planned (following a 10b5-1 plan) or not. It can be tempting to use this as a definitive indicator of routine vs. opportunistic trading, however substantial research shows that 10b5-1 plans do not completely prevent opportunistic trading by executives, nor are non-10b5-1 trades necessarily informative (we intend to write more about 10b5-1 plans in a future article). A wiser approach is to analyze each specific insider’s trade history and discount trades that clearly follow a simple pattern.

Informed insiders can see far ahead

Another older study, What insiders know about future earnings and how they use it by Bin Ke, Steven Huddart and Kathy Petroni, takes one step back and asks what exactly corporate insiders know, and how this knowledge affects their personal investments.

Looking at firms with long streaks of consecutive quarterly earnings growth — “strings” that eventually snap — they found insider selling picks up three to nine quarters before the streak breaks. Insiders who understand their businesses intimately begin reducing their exposure long before the eventual bad news becomes public; the effect was strongest at growth firms, before longer declines, and ahead of bigger earnings misses.

In contrast, the period right before the break, which will be subject to the most intense hindsight scrutiny by regulators, shows almost no activity. In the two quarters immediately preceding the earnings disappointment, abnormal insider selling all but disappeared.

For investors building their strategy on insider data, this reframes the timeline. Insider activity is not chiefly a short-term indicator; it is an early, slow-building signal that rewards patience.

The quiet hand that shapes the news

In Insider Trading and Voluntary Disclosures, Qiang Cheng and Kin Lo examined the relationship between managers' trading and the voluntary earnings forecasts companies issue to the market. Their finding is that managers appear to time guidance around their own trades. When they planned to buy shares, they issued more bad-news forecasts beforehand — pushing the price down before they step in. The effect was most pronounced among chief executives. The authors found little evidence that managers fiddled with forecasts before selling, likely because selling while talking down your own stock invites litigation risk.

Read alongside the other two papers, this is a reminder that a transaction never happens in a vacuum. Insider trades are the visible part of a larger decision, and context — what the company was saying, what the insider has done before, how far the filing sits from major news — is what turns raw filings into a coherent story.

What this means for those building on the data

The research we reviewed in this article allows us to draft some guiding principles for the use of insider transaction data in our own strategies. Before any further analysis takes place, we should decide whether a transaction is at all informative or part of a regular scheme, by comparing recent to historic transactions. Once we have a list of transactions we believe to be informative, we can search for patterns that could indicate a trend-shift in the company’s performance. It is in such patterns, observed over several quarters, where a useful input into our investing strategy may be found.

None of this suggests insider data is a crystal ball, or that it should be the sole input to any decision. What the evidence does suggest is that a naive analysis understates how much signal is in fact there. The value is unlocked through large-scale, consistent, comparable records of who traded, when, how and in what direction, joined with the context needed to interpret them. That data infrastructure can be the foundation of decisively valuable insights.