An investigation of causality between insider transactions and stock returns Zahid Iqbal a , Shekar Shetty b, * a School of Business, Texas Southern University, Houston, TX 77004, USA b School of Business, Western New England College, Springfield, MA 01119, USA Received 24 May 2000; received in revised form 18 June 2001; accepted 19 July 2001 Abstract Prior research shows that corporate insiders engage in profitable transactions by trading securities of their own firms. The main purpose of this study is to examine whether insider transactions and stock returns have causality relationships at the firm level for a sample of 2,521 firms during the period 1988 to 1998. We find a large impact of stock returns on subsequent insider transactions at both the aggregate and firm levels. The impact appears to be negative which suggests that insiders buy after stock price decreases and sell after stock price increases. Our findings on the predictive content of insider transactions for subsequent stock returns are primarily consistent with prior literature. We observe a positive but weak relationship between insider transactions and future stock returns. © 2002 Board of Trustees of the University of Illinois. All rights reserved. 1. Introduction There is empirical evidence that corporate insiders utilize private information to strate- gically trade their own stocks for personal gain. For example, (Seyhun & Bradley, 1997) observe that insiders of firms that file for bankruptcy protection sell their shareholdings before stock prices fall and buy after prices have fallen. (Karpoff & Lee, 1991) provide evidence of insider sales prior to new stock offerings which generally elicit negative stock price reactions. (Lee, Mikkelson, & Partch, 1992), (Penman, 1982), (Seyhun, 1990), (John & Lang, 1991), and (Lamba & Khan, 1999) arrive at similar conclusions that insiders are able to trade profitably around major corporate events. * Corresponding author. Tel.: +1-413-782-1708; fax: +1-413-796-2068. E-mail address: sshetty@wnec.edu (S. Shetty). The Quarterly Review of Economics and Finance 42 (2002) 41–57 1062-9769/02/$ – see front matter © 2002 Board of Trustees of the University of Illinois. All rights reserved. PII: S1062-9769(01)00114-4