Network Centrality and Value Relevance of Insider Trading: Evidence from Europe

Abstract

We examine the value relevance of insider trades in Europe and find that both purchases and sales of well-connected insiders are positively associated with long-term abnormal returns. We argue that the market perceives the purchases of networked insiders as more informative, leading to higher returns. For sales of networked insiders, the market decreases their negative information content, leading to lower negative returns. Our results do not support the view that insiders use their informational advantage to extract economic rents in the form of dollar profits. We posit that they use their networks to provide signals to the market when trading.

Keywords: Insider trading, network centrality, trust, value relevance