INSIDER TRADING ASSIGNMENT FOR EMPIRICAL FINANCIAL ECONOMICS

The purpose of the assignment is to gain hands-on experience of the empirical methods discussed in class, to familiarize students with the data sets commonly used in finance, and to teach students to think strategically about collecting specific data to answer a research question.
Topic: the returns to legal insider trading
This is an individual assignment. All of your work must be completed individually, without any collaboration with, and/or help from others.
Each student is assigned 1 (one) corporation. The list assigning corporations to students will be made available on Quercus once I obtain the complete list of students enrolled in the course from the department administrators. Your task is to analyze the information embedded in insider trades and to evaluate the profitability of insider trading in the company using the tools we have covered in class.
In particular, please do the following:
1) Look at the list on Quercus to see which S&P 1500 corporation you have been assigned. (*You do not need to restrict yourself to the one firm that you are assigned. You can look, for example, at several firms in one industry, or the entire population of firms).
a. If you have not been assigned a firm, the most likely reason is that your enrollment has not yet been processed by the administrators and I am unable to see your student ID. Please send me an email.
2) Download all the data on this firm’s insider trading from the Thomson Reuters database available through WRDS.
a. Read the rest of the points below, and think ahead. Some trades may be better for the purposes of this assignment than others.
3) In the highly unlikely case that you are unable to find at least 10 insider transactions for the corporation you were assigned, send me an e-mail so that I can assign you a new one.
4) Calculate and graph the measures of insider trading (insider net buying) we covered in class or various periods over time: years, quarters, and months. Graph the insider trading measures against the firm’s stock price over time and analyze the graph.
5) Now choose no less than 10 transactions for your firm. (*You do not need to restrict yourself to only 10 transactions.) Calculate measures of both short-term and long-term abnormal performance following the 10 transactions using several benchmark models. Bear in mind that very recent insider transactions may not have returns available in the post-trade period.
a. For this analysis, you can download factor data from the website of Kenneth French.
6) Test (to the extent possible) whether the insiders of the firm traded on private information
7) Suppose we are interested in the total dollar profits that insiders made on their trades. How would you calculate those?
8) Using your answer to (7) calculate the dollar profits insiders made while trading their firm’s stock. Compare these values to the insiders’ compensation, to the extent possible.
9) Compare your answers to (6) and (8). Are your conclusions similar? Why or why not?
10) Write up your results in no more than 5 (five) pages of text. You are allowed to attach graphs and/or tables to the write-up, which do not count towards the 5-page limit. The academic integrity statement (see (A) below) also does not count towards the page limit. In this case, reference them in the text, and indicate where you would insert them (by using, e.g. [Insert Table 1 about here]), but place them at the end of the file. The write-up should therefore consist of 5 pages of text, possibly followed by some graphs and/or tables, if necessary. The write-up should mention the following:
a. Which methods have you chosen and why
b. What do your results suggest as to the information content of insider trading
c. How do your results fit with the literature discussed in class
Notes:
 The extensions marked with (*) are entirely optional. They may be of interest to students who would like to work with large datasets.
 Some of the tasks above are deliberately defined loosely so that you can display good judgement in what is right, what makes sense, and what is important (keep in mind though that your judgement will be judged). It is part of the assignment to figure out how to search databases, and how to extract the data that you need for the project. You are expected to generate a data structure and an overview (in the software package of your choice) that is easy to navigate and intuitive.
Deliverables
Please prepare and submit the following
I. The write-up of your empirical approach and results
II. The code or table that you used to calculate the abnormal returns
III. All data files and/or spreadsheets you used in the process, whether raw data, or intermediate calculations, graphs, tables, etc.
IV. All log files (if applicable) that you generated during the empirical analysis

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