Executive purchases
Why track executive purchases?
The people who run a company already own a great deal of its stock. When one of them reaches into their own pocket to buy more, it is worth asking why.
The short answer
Every time an officer of a US public company, from the CEO and CFO down, buys or sells its shares, they must report the trade to the SEC within two business days on a short form called Form 4. Most of those filings are routine: shares granted as pay, options exercised, shares sold to raise cash. One kind stands apart. An open-market purchase is an executive spending their own money, at the market price, on a stock they already hold more of than anyone sensibly should. It is not a verdict on the company. It is a clue, and a reason to look closer.
Why they are worth your time
Executives are already paid in stock
Most of the pay of chief executives and other senior officers arrives as shares, not cash: restricted stock, performance shares and options. An executive does not need to buy shares to be invested in the outcome. They already are. Buying is a choice, made on top of everything the company has given them.
Their natural move is to sell
Think about an executive's balance sheet. Their salary, their bonus, their equity awards and often the larger part of their net worth all depend on one company. Any financial adviser would tell them to diversify, and most do, steadily, through pre-arranged selling plans. That is why executive sales tell you very little. A purchase runs against the grain. It adds to a position the executive would be better off trimming.
It is their own money, at today's price
Grants are free to the executive. Options are exercised at a price set years earlier. An open-market purchase is neither. The executive looked at the share price on a given day and decided it was worth paying. Form 4 records which kind of transaction each one is, so the purchases can be separated from everything else.
Nobody knows the business better
The SEC calls executives insiders, but this is not about secret information, which they are forbidden to trade on. It is about everything else they see every day: the order book, the sales pipeline, the cost of inputs, how customers are behaving, whether the plan presented at the last investor day is on track. When a CEO or CFO with that view decides the market has the price wrong, that opinion is worth knowing about.
Decades of research point the same way
Academics have studied executive trading since the 1960s, and the finding is consistent. The broadest study found the information sits in the purchases, while sales showed no predictive ability (Lakonishok and Lee, 2001). A second measured it as a portfolio: shares executives bought went on to beat the market, shares they sold did not (Jeng, Metrick and Zeckhauser, 2003). Later work showed that more than half of executive trades are routine and say nothing, and the signal lives in the rest (Cohen, Malloy and Pomorski, 2012).
It gives you a record to check
Every purchase carries a date, a price and a name. Months later you can look back and see what the executive paid, what has happened since, and whether that person has a habit of being right. Over time, the executives with a good record become the ones worth paying attention to.
How executives come to own shares
| Compared | Equity award | Option exercise | Open-market purchase |
|---|---|---|---|
| Who decides | The board | The executive | The executive |
| What it costs them | Nothing | A price set years ago | Today's market price |
| Why it happens | Pay | Pay, usually as options near expiry | Their own decision |
| What it tells you | Little | Little | A great deal |
Opportunity Dispatch
How Opportunity Dispatch helps
Thousands of Form 4s are filed every week, and the purchases that matter are buried among the grants, exercises and sales. Opportunity Dispatch does the sorting.
The purchases page
Every open-market purchase of common stock by an officer of a US-listed company, checked nightly, with the filing date, the amount and the title as filed, with filters by size, title (CEO, CFO and more) and date for members.
See the purchasesYour briefing
Add a company to your briefing and the next purchase by one of its officers reaches you with the rest of its news.
About the briefingThe weekly briefing
A Sunday review of the prior week's purchases, sent to your email, so nothing of size slips past.
Deep dives
When an officer makes a large purchase, we look closely at the company and publish what we find.
The link to investor days
Where a company has held an investor day, the purchase sits next to our recap of it, so you can check the purchase against the plan the executive laid out.
Read the recaps
Sources
- Josef Lakonishok and Inmoo Lee, "Are Insider Trades Informative?" (opens in a new tab), Review of Financial Studies, 2001.
- Leslie Jeng, Andrew Metrick and Richard Zeckhauser, "Estimating the Returns to Insider Trading: A Performance-Evaluation Perspective" (opens in a new tab), Review of Economics and Statistics, 2003.
- Lauren Cohen, Christopher Malloy and Lukasz Pomorski, "Decoding Inside Information" (opens in a new tab), Journal of Finance, 2012.