Inside knowledge: why CEOs selling shares is a potential warning signal

When company insiders sell shares, investors take notice. However, interpreting these trades isn’t always straightforward – insider buying is typically a positive share price signal while insider selling is more nuanced.

Why trading by insiders matter

Company executives and directors possess information that outsiders don’t: real-time visibility into business activity including recent revenue performance, sales pipeline, costs, profit margins and capital requirements. The logic for investors is straightforward: when an insider buys shares, it usually, and singularly, signals they believe the shar e price is undervalued. When insiders sell, it may be driven by different motivations, including: the perception that the company’s share price is overvalued, anticipating a weaker earnings environment going forward, or other reasons that are personally driven rather than company related – these may include meeting tax liabilities for option vesting, paying down debt, or personal investment decisions such as purchasing a property and/or diversifying their investments.

Academic research supports this view – seminal studies show that insider activity in aggregate can predict future returns: when insiders are net buyers across the market, returns tend to be higher over the following year; when they are net sellers, returns tend to be lower.¹ However, the aggregate pattern doesn’t mean every individual sale is a warning signal.

Insider selling – what the studies say

Academic studies highlight the following key insights:

• Insider selling is a useful predictor of future forward returns
  In Australia, studies have shown that insider trades are often informationally motivated.² However, it’s important to differentiate between insider opportunistic trades and routine trades, with the latter typically showing zero correlation to future returns.³ In Australian small caps, we observed 58 companies with insider net sales over the 2024 calendar year, with 62% of those companies subsequently underperforming the S&P/ASX Small Ordinaries Index over the 2025 calendar year.

2025 calendar year relative performance of Australian small cap companies with insider net sales over the 2024 calendar year

• Insider selling signal is weaker and noisier than insider buying
  Unlike insider buying, insider sales have many different drivers (as discussed above) – this ‘noise’ weakens the predictive power of insider selling as a standalone indicator.
• The most informative insider selling are ‘non-routine’ and ‘large’ sales
  Academic research distinguishes between routine selling (e.g. pre-scheduled sales or mechanical option exercises) and discretionary selling – non-routine and/or large sales by key insiders typically carrying a negative share price signal with clustered selling via multiple insiders selling at the same time carrying the strongest negative share price signal. The chart below shows that stocks with the largest net sales over calendar year 2024, had lower relative returns over 2025 than other stocks with net sales. Stocks with net sales of >$15m had a median relative return of -19% as compared to other stocks with net sales of -11% over the 2025 calendar year.

2025 calendar year relative performance of Australian small cap companies vs. insider net sales ($m) over the 2024 calendar year

Australian equity market – recent observations

As highlighted above, insider sales don’t behave the same way every time. Notable Australian stock examples of insider sales that were routine and/or large in dollar terms although represented a small percentage of their total holdings include Pro Medicus (PME), Technology One (TNE) and Life360 (360). In these examples, the disposals were expected by the market rather than information events. As highlighted in the following table, the Nick Scali (NCK) example is more nuanced. The CEO executed a large, non-routine share sale in both percentage and dollar terms, a transaction that would typically raise investor concern. However, this case was differentiated by the absence of concurrent selling by other directors and by the credible rationale provided – portfolio diversification to fund a personal property purchase which supports the view that the sale reflected genuine intent rather than diminished confidence in the business.

By contrast, insider selling characterised by large, non-routine and coordinated sales can be a strong negative share price signal. After all, executives and board members have more insight regarding the company than external investors, which is why the market closely monitors insider holdings. A recent case study is DroneShield (DRO), where the CEO, Chairperson, and a director each sold their entire holdings, resulting in a 31% one day share price decline. While such cases may appear exceptional, the following examples illustrate that situations of this nature are, in fact, relatively common for investors.

Unlike selling, insider buying by company directors and/or executives is typically regarded as a positive share price signal given the belief that the company’s share price is undervalued. A recent example is Bravura Solutions (BVS) which is a key Fund holding. Company management purchased shares in 2023 while initiating a significant turnaround strategy. They continued to add to their personal holdings during share price pullbacks, notably during the March 2025 and May 2025 periods, demonstrating conviction in their medium-term strategy execution. Following these insider purchases, Bravura’s share price has responded positively coupled with subsequent earnings upgrades, reinforcing the view that such insider activity can be a positive indicator of management confidence and future share price performance.

The key lessons are twofold:

• Magnitude, timing, and coordination matter: simultaneous, large sales by insiders are far more informative than isolated and/or scheduled trades; and
• Context is crucial: liquidity, recent price run-ups, and disclosed reasons for the sale provide some insight whether a sale is noise or a signal.

Hence, insider activity should function as an alert for investors prompting deeper due diligence and scrutiny.

The key takeaways for investors

Insider selling is not inherently negative news, although certain patterns are statistically meaningful:

• Strong signals are large, non-routine, and clustered insider selling which often precedes weaker returns.
• False or mixed signals are routine, small, or tax-driven/diversification sales carrying little information.

While insider selling in isolation is never definitive evidence that a company’s fundamentals are deteriorating, large sales by insiders can be a negative signal for share price performance and warrants closer scrutiny. Conversely, when insiders retain meaningful ownership and/or increase exposure, it often reflects confidence in the company’s long-term direction and alignment with shareholder interests.

Corporate governance and management alignment are core inputs into the Maple-Brown Abbott Australian small caps investment process. As part of this framework, we actively monitor and assess management alignment, incorporating ownership structure and insider behaviour. Since inception, the Fund has maintained a highly positive aggregate alignment, reflecting our focus on investing alongside management teams who demonstrate long-term commitment and disciplined capital stewardship.