That is the forecast of a corporate-insider-based econometric model constructed by University of Michigan finance professor Nejat Seyhun. One of academia’s leading experts on corporate insiders, he recently updated his model’s forecast for Barron’s.
The key to Seyhun’s model is that only some of those who the law defines as insiders are worth following. We should pay attention to the buying and selling behavior of corporate officers and directors, as he has found from his research that they have genuine insight into their companies’ prospects. In contrast, we should overlook the transactions undertaken by a company’s largest shareholders, since they do not, on average, possess this insight.
He points out that a large portion of corporate officer and director compensation comes in the form of equity, and insiders have no choice but to sell their shares to get the cash necessary for their living expenses. When these insiders sell into strength, it often represents little more than opportunistic behavior.
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