Corporate Insider Trading During Market Turmoil Offers Powerful Signals for Investors, New COVID-Era Study Shows

During periods of intense market volatility, investors often struggle to separate meaningful signals from background noise. A new academic study suggests that one group consistently cuts through that chaos: corporate insiders. Research examining insider trading behavior during the COVID-19 market shock shows that executives and insiders often acted in ways that accurately anticipated how stocks would perform long after the crisis phase had passed.

The study, conducted by researchers from Washington State University and published in the Pacific-Basin Finance Journal, focuses on how insiders traded during the unprecedented uncertainty of the COVID-19 pandemic. The findings reveal that insiders frequently moved against prevailing market sentiment, and their decisions proved to be strong indicators of future stock performance.

What the Study Examined

The researchers analyzed legally reported insider trades during the COVID period, particularly around early 2020 when global markets experienced their sharpest decline in decades. Corporate insiders—such as executives, directors, and large shareholders—are required by law to disclose their trades to the U.S. Securities and Exchange Commission. These disclosures create a detailed public record that allows researchers to track insider behavior across firms and time.

The pandemic provided what the researchers describe as a natural laboratory. Unlike routine downturns, COVID-19 created extreme uncertainty. Governments responded in different ways, supply chains broke down, and economic forecasts shifted rapidly. This environment allowed the researchers to observe how insiders behaved when even experienced market participants lacked clear guidance.

Contrarian Trading Stood Out

One of the most striking findings was how often insiders zigged when the market zagged. As panic selling swept through markets in late February and March 2020, insiders dramatically increased their stock purchases. From late February to early April 2020, insider buying rose sharply while the broader market was sinking.

Later, as markets stabilized and began to recover, insiders shifted in the opposite direction. Over the remainder of 2020, insider selling increased substantially—about four times higher than normal. This pattern suggests that insiders were not reacting emotionally to market swings but were instead making calculated decisions based on valuations and long-term expectations.

Insider Trades Predicted Future Performance

The study found that insider trades during this period were not just symbolic—they were highly informative. Stocks that insiders bought during the crisis tended to perform better in the following year. Stocks that insiders sold during the recovery phase generally underperformed later.

Statistical analysis showed a clear correlation between insider activity and one-year forward stock returns, extending beyond the most chaotic phase of the pandemic. In simple terms, insiders appeared to be buying undervalued stocks and selling overvalued ones with remarkable accuracy, even during one of the most unpredictable periods in modern market history.

Why Insider Trades Matter

While insiders are legally prohibited from trading on non-public, material information, they still possess deep knowledge of their firms. They understand internal operations, financial resilience, supply chain exposure, and strategic plans better than any outside investor. During a crisis, that advantage becomes even more meaningful.

The study highlights that information asymmetry—the gap between what insiders know and what the public knows—widens during periods of extreme uncertainty. As a result, insider trades become more informative precisely when investors need reliable signals the most.

A Surge in Insider Activity

Another surprising finding was the sheer volume of insider trading during the pandemic. The researchers observed far more insider trades than usual, especially during the early crisis phase. This surge suggests that insiders were actively responding to perceived mispricing rather than sitting on the sidelines.

The increased activity reinforces concerns among regulators and market observers about fairness and transparency during crises. While insider trading in this context was legal and properly disclosed, it underscores how differently insiders and regular investors experience market turmoil.

Implications for Everyday Investors

For individual investors, the study offers a practical takeaway: watching insider trades can be especially useful during volatile markets. Insider filings are publicly available through the SEC and financial data platforms, making them accessible to anyone willing to track them.

The research does not suggest blindly copying insider trades. Instead, it emphasizes paying attention to patterns, particularly during market shocks. When insiders collectively buy during a downturn, it may signal undervaluation. When they sell heavily during recoveries, it may indicate overheated prices.

Lessons for Regulators and Markets

From a regulatory perspective, the findings raise important questions. If insider trades become more informative during crises, should disclosure rules be tightened or reporting timelines shortened during volatile periods? The study reinforces long-standing debates about how markets can balance efficiency with fairness when insiders hold significant informational advantages.

At the same time, insider trading signals may actually help improve market efficiency. By buying and selling based on fundamentals, insiders may help prices adjust more quickly toward fair value—even if those signals are not immediately obvious to the public.

Why COVID-19 Was Unique

Unlike previous financial crises driven by banking failures or asset bubbles, COVID-19 was a global health shock with no clear historical parallel. The uncertainty was not just financial but operational, logistical, and political. This made insider judgment particularly valuable, as insiders could better assess how resilient their companies would be under prolonged disruption.

The study suggests that during such rare events, insider behavior becomes an even stronger indicator of future outcomes than during normal market conditions.

The Bigger Picture of Insider Trading

Research on insider trading has long shown mixed results. In stable markets, insider signals can be diluted by noise and routine transactions. However, this study adds to growing evidence that crisis periods amplify the informational value of insider trades.

For investors willing to dig deeper, insider activity offers a window into how those closest to companies interpret uncertainty. During calm markets, that window may be cloudy. During crises, it becomes far clearer.

Final Thoughts

The COVID-19 pandemic reshaped markets in countless ways, but it also revealed how differently insiders and the general public respond to uncertainty. This study shows that insider trading during periods of extreme volatility can serve as a powerful forecasting tool—one rooted not in speculation, but in informed judgment.

For investors, regulators, and researchers alike, the message is clear: when markets are most chaotic, paying attention to what insiders do—not just what they say—can offer valuable insight.

Research paper:
https://doi.org/10.1016/j.pacfin.2025.102957