Firms routinely reduce their employee headcount in response to competitive and economic pressures. The effectiveness of downsizing appears mixed as firms enjoy positive excess returns but also increased delisting and default likelihoods, consistent with compensating investors for additional risk. Insiders at downsizing firms are more likely to purchase shares than those at other firms, and in this study, we explore insider trading activity as a signal about the effectiveness of corporate downsizing. Exploiting heterogeneity within downsizing firms, we find that the excess returns observed in downsizing firms are concentrated in firms where insiders purchase shares. Further, insider purchases are followed by lower future delisting likelihoods and financial distress in downsizing firms. Finally, we observe that insider purchases at downsizing firms are more prominent when trades are easily observable. Our results are consistent with insiders intentionally providing costly, credible signals about corporate executives' plan for firm improvement following downsizing.

We examine how institutional investors trade stocks with high research and development (R&D) expenses and investigate whether they can detect value-relevant R&D. We document significant differences between hedge funds and other institutional investors in their trading in high R&D stocks. We find that hedge funds (other institutional investors) invest more (less) in high R&D stocks compared to all other stocks. Moreover, hedge funds exhibit strong stock-picking ability in high R&D stocks, and hedge funds with larger allocations to high R&D stocks generate higher future fund returns. Our findings suggest that hedge funds have superior skill in identifying value-relevant R&D.

We provide evidence that some profitable insider stock selling is motivated by public information. At firms that disclose having concentrated sales relationships, insiders appear to sell their own stock profitably based on public information about their principal customers. Supplier insiders also sell more stock when public information about their customers׳ recent returns and earnings surprises suggests they will earn larger profits. These results are stronger when outside investor attention could be lower. Outside of this setting, insiders engage in a higher proportion of routine sales and their sales are less profitable. We do not find similar patterns for insider purchases.

Using 13F quarterly holdings data of institutional investors, we introduce a novel measure for differences of opinions among investors by analyzing divergence in institutional investors’ trades. We find that increases in institutional trade dispersion predict a significant decline in future abnormal returns. Moreover, we find that this relationship persists after controlling for other proxies of divergence of investor opinions, such as the dispersion in analysts’ earnings forecasts, the change in the number of institutions holding the stock, and the dispersion in institutional investors’ holdings relative to their benchmarks. Consistent with Miller (1977), underperformance of high-dispersion stocks is found to be the strongest among stocks that experienced recent significant price increases, the stocks with the highest mispricing scores, and the stocks that face increases in short-interest positions after the onset of dispersion.