Georgy Chabakauri, Vyacheslav Fos, Wei Jiang
Review of Finance, Volume 30, Issue 3, May 2026, Pages 921–948, https://doi.org/10.1093/rof/rfaf065
All major securities markets have developed laws, rules, and systems that regulate trades by insiders and their affiliates who have privileged access to material nonpublic information, and criminalize insider trades that are based on, or misappropriate, such information. While the theory and practice of insider trading law and regulation have evolved over time, the boundary of insider trading remains blurry and becomes more so with new developments of the market. In this study, we explore the possibility of insider trading on non-insider information in a setting where an insider (i.e., a CEO) makes trading decisions on their firm’s stock based on assessed possibilities of trading by activist shareholders. Though the insider does not have direct information about the arrival of the “barbarians at the gate,” privileged information about their own firm’s fundamentals helps the insider to filtrate public information and eventually trade on public information with a distinct advantage.
In recent decades, real-time trades/orders have essentially become public information. Modern “tape readers” specialize in looking at electronic order and trade books to hypothesize the motives underlying any unusual trading patterns and to analyze where a stock price may be headed. Compared to other forms of informed trading by outsiders (such as those betting on takeover prospects or earnings surprises), activists are better positioned to camouflage their trades due to their ability to spread the trades to time market liquidity. This is because the deadline of the private information, in the form of a Schedule 13D, is largely self-imposed. However, given the concentration of trades in the relative short period of time (usually 2—3 months), and a hard deadline of ten calendar days after the 5% crossing-date (the disclosure triggering event), it becomes increasingly difficult for activists to hide their trades in market liquidity as they approach Schedule 13D filing. Now the question becomes: Are insiders better equipped to detect activist trading than outside investors and the market makers prior to Schedule 13D filing?
We hypothesize and solve in a model to conclude that the answer is a “yes” based on both incentives and capabilities. First, insiders have stronger incentives than general investors to get informed of activist plans. The information about an upcoming Schedule 13D filing is valuable to general investors due to the significantly positive average announcement return. Because job turnover increases and compensation drops for senior executives at the targeted firms, hedge fund activism often meets defense from the management. Second, insiders enjoy an information advantage in an indirect way. Conditional on both insiders and outsiders observing the same order flows and trades, insiders have a more refined information filtration to isolate trades potentially generated by activist interests from those motivated by leakage of or speculations on firm fundamentals, such as earnings or sales growth.
Empirically, we show that corporate insiders engage in share purchase, at frequencies significantly above normal, on the same day when activists trade, and three days afterwards. Such a coincidence is intriguing given that activist trading is not observable in real time.