Can Traders Beat the Market? Evidence from Insider Trades, China Finance Review International, 2014, 4(3), 243-270. (Co-authored with Murli Rajan and Xuewu Wang)

Using the comprehensive trading data for the U.S. corporate insiders between 1993 and 2008, we document robust evidence that insiders as a whole achieve transaction prices superior to the volume-weighted average prices. This outperformance, expressed as a positive trading alpha, remains after we control for trade difficulty, insider reputation and the corporate role ranks of insiders. Upon analyzing the time series patterns of portfolio returns to strategies of mimicking corporate insiders with abnormal trading alphas in the extreme quartiles, we conclude that the outperforming insiders at the aggregate level resemble value investors who act on long-term fundamental information, trade patiently and earn rents from providing liquidity. Moreover, outside investors benefit from mimicking the acts of outperforming insiders in real time. The sizeable profit from this mimicking strategy withstands the erosion from adjustments for standard factors in the asset pricing literature and the adjustment for stock characteristics.

Time-Varying Liquidity Trading, Private Information and Insider Trading, European Financial Management, 2014, 20(2), 321-351. (Co-authored with Xuewu Wang)

This paper investigates the insider trading before scheduled versus unscheduled corporate announcements to explore how corporate insiders utilize their private information when the amount of liquidity trading is time varying. Using a comprehensive insider trading database, we show that the insider's propensity to trade before corporate announcements increases in the amount of liquidity trading before both the scheduled and unscheduled announcements. This pattern is more pronounced among unscheduled announcements than scheduled ones. We also find insiders buy (sell) more before announcements with positive (negative) announcement returns. This association is much stronger before unscheduled announcements than before scheduled ones. Consistent with the informativeness of insider purchases, we find insider purchases are more profitable before unscheduled announcements than before scheduled ones. Taken together, our empirical results provide direct evidence that insiders time their trades around scheduled and unscheduled announcements to exploit the varying extent of liquidity trading. This trade timing is manifested in the insider's propensity to trade, the insider's direction of trade and the profitability of their trades before such announcements.

Flight to Liquidity due to Heterogeneity in Investment Horizon, China Finance Review International, 2012, 2(4), 316-350. (Co-authored with Xuewu Wang)

This paper provides some rational perspective for the flight-to-liquidity event. My model highlights the inherent difference in investors' investment horizon, and thus their sensitivity to changes in transaction costs in the stock and bond markets. When stock market deterioration results in higher trading costs, the existing marginal investor shifts wealth to bonds instead of remaining indifferent between stocks and bonds. At the new equilibrium, there is a higher fraction of bond ownership and a longer average investment horizon among stock holders. I demonstrate empirical evidence in strong support of the theoretical predictions and make the case for the flight-to-liquidity event as a result of investor heterogeneity in investment horizon.

An Empirical Analysis of Corporate Insiders' Trading Performance, China Finance Review International, 2012, 2(3), 246-264. (Co-authored with Murli Rajan and Xuewu Wang)

This paper conducts an empirical analysis of the trading performance of US corporate insiders. Based on the Volume Weighted Average Price, we propose a metric to measure the trading performance of US corporate insiders: trading alpha. This metric is clean of the contamination effect from insiders' own trades. We apply this metric to examine whether insiders can beat the market when they trade. We find that corporate insiders achieve positive trading alpha on both purchases and sales of stocks on average. The existence of a positive trading alpha is robust to controlling for firm, trading and insider characteristics. More importantly, we find evidence for the persistence in corporate insiders' trading performance. Those insiders who traded well in the past continue to trade well over time. Those who well execute in purchases of stocks also perform well in sales.

Financial Value of Reputation: Evidence from the eBay Auctions of Gmail Invitations, Journal of Industrial Economics, 2011, 59(3), 422-456.

In a marketplace of repeated transactions with asymmetric information, theory predicts that sellers with a good reputation have a higher probability of sale and receive a higher transaction price. In this article, I test this theory using more than 55,000 auctions of "Gmail invitations" on eBay, essentially a market of homogeneous goods with non-enforceable contracts. This is an ideal environment to test the theory because it allows a clean separation of the reputation effects from other controlling factors. This study provides evidence in favor of the theoretical predictions because sellers who improve their reputation from the lowest to the next quintile experience a 6.2% higher probability of sale and a 6.1% hike in the implied buyer valuation after adjusting for truncation bias from failed auctions and explicitly controlling for seller heterogeneity such as skill. This study also shows that in addition to a dimension of reputation universal across different product markets, the product-specific dimension of reputation significantly affects the auction outcomes.

Time-Varying Informed and Uninformed Trading Activities, Journal of Financial Markets, 2005, 8(2), 153-181. (Co-authored with Guojun Wu)

We develop a framework to investigate time-varying interactions between informed and uninformed trading activities. By estimating the model for 40 NYSE stocks, we demonstrate that the buy and sell arrival rates of the uninformed traders are different and time-varying. Informed traders strategically match the level of the uninformed arrival rate with a certain probability. Uninformed traders tend to adopt contrarian strategy in reaction to high prior stock returns, but employ momentum strategy in reaction to high prior market returns. The estimated time-varying probability of informed trading is a good predictor for various measures of bid-ask spreads, and is a better measure of information asymmetry than several existing measures.