Market efficiency reloaded: Why insider trades do not reveal exploitable information

Several studies have emphasized a slow price adjustment to reported insider trades for Germany. The results presented in this paper, though, show that this is mainly caused by a subset of high arbitrage risk stocks. In fact, the abnormal return difference between the quintiles of stocks with highest and lowest idiosyncratic risk is in the range of 2.99-4.90% over a 20-day interval. These results are robust even in the context of a joint generalized least squares approach. By developing a simple zero-investment arbitrage trading strategy mimicking insider trades, it turns out that such a trading strategy, in most cases, generates significant positive returns as long as transaction costs are neglected. However, the outperformance disappears in all risk quintiles, if bid/ask spreads are taken into account. We conclude that the market's under-reaction to reported insider trades can mainly be explained by the cost of risky arbitrage and is therefore not exploitable.