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It is not surprising that corporate insiders earn profits from trading their stocks, but it is surprising that outsiders can earn abnormal returns by mimicking the insider trades using publically available information. We suggest that these anomalous returns are explained by the size and price/earnings ratio effects. Controlling for these factors reduces outsider profits by one-half. The additional assumption of 2 percent transactions costs makes outsider profits zero or negative. Measured insider profits are also greatly reduced by controlling for size and price/earnings effects. Insider profits are a modest 3 percent per annum after deducting a 2 perecnt transactions costs fee.
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Rozeff et al. (1988) studied this question.
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