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Do Insiders Exploit Anomalies?

Many studies show that future stock returns are predictable. These findings are consistent with either mispricing or risk. In this paper, we use a large backward-extended insider trading database from 1975 to 2014 to construct anomaly-specific measures of mispricing that are designed to be unrelated to risk. We find that the predictive ability of anomalies survives when the direction of insider trading agrees with the anomaly, but the predictive ability of the anomalies completely disappears when insider trading disagrees with the anomaly. We conclude that mispricing is an important component of the predictive ability of all thirteen anomalies we consider.