Information Asymmetry and Institutional Investors' use of Insider Trading Information beyond Use of Accounting Information

Reducing information inequities between manager insiders and investors have long been a regulatory goal. This study examines whether institutional investors incorporate insider trading information beyond the use of accounting numbers and thus mitigate information asymmetry between insiders and investors. This study shows that change in ownership by transient institutional investors, i.e., institutions that trade actively to maximize profits, is positively associated with net insider trading, after controlling for accounting information. Second, this study provides evidence consistent with part of information source of transient institutional investors to be publicly insider trading signals rather than to be solely management information release. Finally, this study shows insider profits decrease in transient institutional ownership, suggesting the incorporation of insider trading information by institutional investors limits insider profits. One interpretation of the findings is that ownership by institutional investors may serve as an alternative means to reduce information asymmetry between insiders and investors in addition to securities regulations.