Much research has been done on the predictive power of analyst recommendations and insider trading separately, but this is the first paper I’ve seen which attempts to study their effects jointly. The existing consensus about the information content of insider trades is reaffirmed: sales by insiders are not generally meaningful, since insiders tend to sell regardless of their opinion of a stock’s prospects, in order to get cash on hand. Insider purchases however are a much stronger signal of the positive sentiments; insiders typically don’t buy unless they have reason to believe the price will go up. The significance of analyst recommendations runs in the opposite direction. Negative (sell) ratings from analysts are found to be meaningful, while positive (buy) ratings are less so. The research was done by Jim Hsieh, Lilian K. Ng, and Qinghai Wang. Here’s their abstract:

This study jointly evaluates the informativeness of insider trades and analyst recommendations. We show that the two activities often generate contradictory signals. Insiders in aggregate buy more shares when their firm’s stock is unfavorably recommended or downgraded by analysts than when it is favorably recommended or upgraded. This result is robust to various controls such as varying degrees of analyst coverage, firm size, book-to-market ratios, and stock price momentum. We find that analyst recommendations affect insider trading decisions, but not vice versa. Our further analysis shows that insider trading is informative when signaling positive information, and analyst recommendations are informative when conveying negative information. The overall results imply that corporate insiders and financial analysts do not substitute each other’s informational role in the financial market.

Read an earlier version of the paper here: Analyst Recommendations and Insider Trading