(March 14) – “Everybody knows that executives of technology companies have gotten hugely rich in recent years on stock option grants. Now comes academic research identifying another vein of gold they are mining: nonpublic information about their companies’ products in development,” wrote Gretchen Morgenson in The Sunday New York Times.
“Two respected accounting professors studied some 324,000 stock trades made by officers at more than 10,000 public companies from January 1985 to November 1997. They concluded that insiders at technology companies profited greatly by trading on nonpublic information.
“The study, by David Aboody, an assistant professor of accounting at the Anderson School of the University of California at Los Angeles, and Baruch Lev, the Philip Bardes professor of accounting and finance at New York University’s Stern School of Business, split the companies into those that are heavy users of research and development — technology concerns — and those that aren’t. It then compared insiders’ returns.
“Company stock purchases by insiders at roughly 3,800 technology companies outperformed those by counterparts at 6,200 or so other concerns by 3 to 1. Sales by insiders at research-oriented companies also performed better, but by a narrower margin.
Technology insiders made 3 percent on their buys within 25 days; after six months, these insiders had gains of 9.6 percent. Insiders in more mundane companies earned 0.9 percent on their purchases within 25 days and 3.6 percent after six months.
“All these figures are market-adjusted, meaning the broad market’s performance was subtracted from the insiders’ gains to come up with final returns. The gains are also adjusted for excess risks and rewards associated with technology stocks.