Here’s some investing advice from University of Kansas researchers: Don’t just follow the trades made by corporate insiders; follow the trades made by corporate insiders at companies that are advertising actively.
New research by KU School of Business professors Kissan Joseph and Jide Wintoki finds that company insiders at firms that advertise achieve higher portfolio gains than company insiders at firms that aren’t spreading those advertising dollars around.
“These findings demonstrate that insiders’ knowledge of their company’s advertising expenditures is a strong informational advantage for them when it comes to trading, the researchers say,” according to a KU news release. “And for copycat investors, it means that insiders at firms that advertise are the best insiders to mimic.”
Joseph and Wintoki outline their findings in a paper titled “Advertising Investments, Information Asymmetry, and Insider Gains,” slated for the latest issue of the Journal of Empirical Finance.
“In their study, Joseph and Wintoki analyze publically available advertising and transaction data from more than 12,000 firms between 1986 and 2011 and find that insider gains are significantly greater at firms that are making advertising investments,” the press release says. “Specifically, a zero-cost portfolio that’s long on firms with net insider purchases and advertising investments, and short on firms with net insider purchases and devoid of advertising investments, produces annual abnormal returns of 5.5%.
“In addition, Joseph and Wintoki find that investors’ reaction to news of insider purchasing is significantly more pronounced at firms characterized by advertising investments — investors rationally recognize the greater information content associated with insider purchases at these firms.
“In the three days following disclosure of insider purchases at companies that advertise, their stock price rose by 0.3% more than those in companies where managers also bought their own company stock but do not advertise,” Wintoki says. “This number translates to a 27% annualized return.”
How much a company bombards the public with their message doesn’t matter, the study finds. As long as the level of expenditure on advertising is “nontrivial,” the company’s insiders tend to have higher-than-average gains.
“So if Coke spends $100 million and Pepsi spends $50 million, that doesn’t mean that Coke insiders do twice as well as Pepsi insiders,” Joseph says. “What it means is, both Coke and Pepsi insiders on average will outperform by the same amount insiders at a third soda company that isn’t advertising at all.”
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