Strategic Trading by Insiders in Reaction to Institutions: A Rat-Race Effect

We examine how trading by institutional traders affects those by insiders. Using data at the trade level, we find insiders complete their trades faster when institutions trade on the same side in the stock. The effect of institutional activity on insider trading is more pronounced when insiders are more informed and if insider trades are associated with long-lived information. This finding supports the information-based hypothesis where insiders accelerate their trading due to competition with institutional investors for information. We identify two channels, brokerage and proximity, where insiders compete with institutional traders for information. We find the competition is more intense when (1) insiders and institutional investors share the same broker; and (2) institutional investors are local to the firm’s headquarter.