Dr. Simone Wies (Duke University)

ABSTRACT: We study how the stock market uses insider stock trading prior to firm product innovation to infer information about the innovation’s potential. Using a sample of high-technology firms, we find that insider stock purchases provide incremental information for investors in valuing firm product innovation: firm product introductions preceded by insider stock purchases generate additional abnormal returns of 1.5% around a three-day event window. We find that this effect is weaker if there are lower levels of information asymmetry between the firm and its investors, or if the firm enjoys a reputation for firm product innovation. This evidence points to a substitution effect among alternative information signals of innovation potential. We do not find an impact of management quality on cumulative abnormal returns around firm product innovation. These findings offer new evidence to support two broad ideas: that investors use insider stock purchases in valuing firm innovation efforts and that they do so conditionally on alternative information signals.