To what extent do behavioral biases, such as overconfidence and anchoring, complement or distort the private information hypothesis as explanations of insider trading patterns?

Sammanfattning

This thesis investigates what drives insider trading returns by evaluating three partly competing and partly complementary explanations: the private information hypothesis, overconfidence, and anchoring. Using a critical literature synthesis, published empirical studies are assessed against a set of theoretical predictions derived from the private information hypothesis and behavioral finance, enabling systematic comparison across mechanisms and market contexts. The evidence most strongly supports the private information hypothesis. Insider purchases consistently generate abnormal returns across different methodologies, time periods, and markets, with predictive power concentrated among opportunistic traders and smaller firms where information asymmetry is highest. Strategic timing evidence confirms that deliberate exploitation of private information drives the aggregate pattern, though the evidence applies to a specific and identifiable subset of trades rather than insider trading uniformly. Overconfidence is theoretically compelling and well-documented among retail investors and executives, but direct empirical validation among corporate insiders specifically remains limited. The supporting evidence is analogical rather than direct, and alternative explanations including skewness preference and career concerns cannot be fully ruled out. Anchoring is on firmer empirical ground. Direct evidence shows that insiders trade differently near the 52-week high in ways that carry no informational content, though the most informed insiders exploit rather than fall victim to this bias. The interaction between overconfidence and anchoring has never been directly tested. This thesis develops conceptual propositions suggesting the interaction may be reinforcing or offsetting depending on signal strength and insider type and proposes a regression framework for future empirical investigation. The findings carry important welfare implications: adverse selection costs imposed on uninformed investors vary systematically with firm size and transparency, and behavioral distortion introduces additional welfare costs through noise in the price formation process that current regulatory frameworks have not fully addressed.