For Insiders, It's All in the Timing
[Financial Analysis and Commentary]</br></br>When it comes to buying and selling their companies' stocks, there are two kinds of corporate insiders: Those who trade on a fixed schedule and those who don't. Investors should be careful to distinguish between the two.</br></br>Microsoft Chairman Bill Gates falls into the former camp, selling 20 million shares of the company he founded every three months. Those sales are made under a 10b5-1 plan, the Securities and Exchange Commission rule that allows executives to set up stock transactions in advance and thus not run afoul of insider-trading restrictions. But Mr. Gates's sales are so regular that the fact that they are made under a 10b5-1 plan is besides the point.</br></br>If one were to strip out such routine trades -- whether made under a 10b5-1 plan or not -- what would the performance of insider trades look like? Economists Lauren Cohen and Christopher Malloy of Harvard Business School and Lukasz Pomorski of the University of Toronto did just that. Their findings, recently published in the Journal of Finance, showed just how serendipitous the timing of the remaining insiders' trading turned out to be. In a similar analysis, The Wall Street Journal examined trades by corporate executives in the week before company news was announced.</br></br>The results showed trades executed by opportunistic executives were far more likely to score big returns (or avoid large losses) than those by insiders who traded at the same time each year.