Can insider trading in US hospitality firms predict future returns?

Insider trading, defined as executives' trading their own firm's stocks, is often based on private and material information that has the potential to affect the firm's future stock prices. Although trading based on information asymmetry is an important topic in finance, there is limited research on insider trading in the hospitality industry. The structure and the nature of the U.S. hospitality industry warrants exploration of this important issue. Accordingly, this study uses the event study methodology to examine 21,785 transactions from 165 hospitality and tourism firms from 2010 to 2016. Empirical test results show that insider transactions earn abnormal stock returns, suggesting that outside investors may do well by imitating insider trades. Moreover, insider purchases are found to predict higher abnormal returns than insider sales after the event day. Following the trades of top executives and senior managers, especially those in hotels, resorts and restaurants, can be a useful strategy.