Insider trading around auto recalls: Does investor attention matter?

Using a comprehensive sample of customer complaints filed with the National Highway Traffic Safety Administration, we examine the differences in the timing of insiders’ and investors’ use of outside generated public information. We first find that levels of customer complaints predict future auto recalls and their financial consequences, suggesting that these publicly available customer complaints contain value-relevant information. We then find that customer complaints are not contemporaneously associated with stock returns but predict large negative abnormal stock returns during the period following the recall announcement. Thus, we find that the market generally fails to impound the information contained in customer complaints in a timely manner. We then examine whether mutual funds, as sophisticated investors, appear to use the complaint data and find that, consistent with the overall market, in the aggregate they do not appear to use the complaint data to inform their trades until after recall announcements. However, mutual funds that focus more of their trades in the auto industry appear to pay more attention to the complaint data and trade consistent with the data before recall announcements. We then find that the top five executives of the car manufacturers in our sample are significant sellers of personal shares prior to the announcement of auto recalls, particularly when customer complaints are high. Our findings suggest that insiders’ informational advantage is at least in part due to general investor limited attention to publicly available information.