Abstract

We examine how insiders and firms trade when arbitrage is limited. When arbitrage is costly (proxied by high idiosyncratic risk), insiders and firms earn higher absolute returns on their trades (insider trading, share repurchases, and seasoned equity offerings) in the following year. Furthermore, they initiate their trades following greater past price movements in the preceding year. These results are not driven by information asymmetry or firm size. Overall, our results are consistent with the idea that insiders and firms compete with outside arbitrageurs in exploiting mispricings and benefit when outside arbitrage is limited.

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