Do Implied Volatility Comovements Measure Macro-connectedness?

Robert Bushman†

Vivek Raval‡

Sean Wang§

November 2017

Abstract: We find VIXRSQ, the R-squared from annual regressions of market implied volatility
on firm implied volatility to be an effective measure of a firm’s level of macro-connectedness.
From 1996-2015, higher VIXRSQ firms have: (1) insider trades that are more strongly associated
with one-year ahead aggregate returns, (2) earnings that are more strongly correlated with
aggregate measures of equity returns, volume, and volatility, and (3) changes in firm profits that
are associated with changes in aggregate profits for the calendar year. Our results imply high
VIXRSQ firms can serve as bellwethers by providing aggregate information about both equity
returns and profitability.

We thank Ryan Ball, Alan Crane, Hemang Desai, Ellen Engel, Gustavo Grullon, Kris Ramesh, James Weston and workshop
participants at Rice University, Southern Methodist University, University of Illinois in Chicago, and University of North Carolina
for their helpful comments.

† ‡
Robert Bushman, Kenan-Flagler Business School, University of North Carolina (Email) bushman@unc.edu; Vivek Raval,
University of Illinois at Chicago (Email) vraval@uic.edu; § Corresponding author: Sean Wang, Jones Graduate School of Business,
Rice University, 6100 Main Street MS 531, Houston, TX 77005, (Email) sean.wang@rice.edu, (Tel) 713.348.5935, (Fax)
713.348.6331

Electronic copy available at: https://ssrn.com/abstract=3066342

1. Introduction

The desire of investors to identify macro-connected firms, sometimes called bellwether firms,
has long been a key feature of capital markets.1 By macro-connectedness we refer to the degree to
which a firm’s information flows reflect information pertinent for assessing the status and future
direction of the entire economy or perhaps of a particular sector. When the operations and
prospects of a firm are reflective of the overall economy, private, internal information possessed
by managers that is valuable for evaluating and forecasting the individual firm’s performance may
also be valuable for evaluating and forecasting the macroeconomy. This is true even if managers
are not fully aware of the macroeconomic content of their information and view it only from the
perspective of its firm-specific implications. Further, information disclosed by macro-connected
firms is likely to be informative about the firm and the wider economy.
A growing literature provides evidence that the information of “bellwether” firms is more
highly informative about the macroeconomy than that of non-bellwethers. These papers measure
macro-connectedness using a variety of approaches which are generally based either on the
correlation of realized outputs or firm size. For example, some papers use firms’ earnings or
analyst forecast revisions and create measures based on a historical time series between earnings
and the macro-economy (Bonsall et al. 2013; Patton and Verardo 2012), while others use firm size
(Anilowski et al. 2007; Konchitchki and Patatoukas 2013 and 2014). However, because earnings
are released infrequently, such measures require a long time series to gather substantial statistical
power and thus are sticky and evolve slowly over time, whereas macro-connectedness is likely a
dynamic property that varies significantly over time as the economic landscape changes. Firm size
also evolves slowly and measures of macro-connectedness based on size ignore the possibly that
the information of smaller firms may be more informative about the macro economy. 2 An
alternative approach is to use high frequency market data to estimate the correlation of
fundamentals on a timelier basis using measures such as market beta or market synchronicity (e.g.,

1
The Dow Jones Industrial Average was invented by Charles Dow in 1896, as a price-weighted index of 12 firms that
was designed to proxy for the broader U.S. economy.
2
In this regard, Scherbina and Schlusche (2016) measure the extent to which a firm is a return leader whose returns
predict the returns of follower firms. They show that, independent of its size, any firm may emerge as a return leader
by being at the center of an important news development that has ramifications for other firms. Stocks undergoing
news-generating developments see an increase in the number of stocks whose returns they lead.

Electronic copy available at: https://ssrn.com/abstract=3066342

Patton and Verardo 2012), although high-frequency returns can be potentially subject to illiquidity
and noise issues (Dimson 1979).3
In this paper we consider the possibility that, beyond the historical correlations of stock
returns, earnings and firm size, an important aspect of macro-connectedness involves the degree
to which a firm’s expected information flows are connected to the expected information flows of
the macroeconomy. We examine whether the comovement between the implied volatility of firms’
stock returns and the implied volatility of market returns can quantify a distinct aspect of a firm’s
level of macro-connectedness.4 The intuition for our measure builds on the idea that return
volatility is often interpreted as a measure of information flow impounded into price. Interpreting
implied volatility as a measure of the market’s expectations about the intensity of upcoming
information arrival, we construct a time-varying measure designed to capture connections between
expected information flows at the firm level and the aggregate market.
Our metric, VIXRSQ, is the R-squared from annual firm-level regressions of the daily
implied volatility of the S&P500 index, called the VIX index, on firms’ daily option implied
volatilities. While a number of studies consider return implications of the idiosyncratic and
systematic components of firms’ implied volatilities (e.g., Dennis et al., 2006; Diavatopoulos et
al., 2008), we are the first to consider the amount of variation in implied aggregate market volatility
explained by an individual firm’s implied volatility as a measure of the firm’s macro-
connectedness. We find that VIXRSQ has a mean (median) of 0.21 (0.11) with substantial cross-
section and time-series variation, indicating that the measure is dynamic and varies widely across
firms. Also, VIXRSQ appears to capture something that is distinct from other measures of macro-
connectedness as it is not highly correlated with either firm size or market beta. In theory, we
might expect the information contained within a firm’s implied estimates of macro-connectedness
to exceed that of historical estimates because (1) investors’ beliefs about future information should
use any available information in these historical estimates, and (2) historical estimates may be less
reliable when the firm has significantly changed since the estimation period. Of course, it remains
an empirical question as to whether this measure of comovement in anticipated information arrival
has incremental information about a firm’s macro-connectedness over other measures.

3
Market synchronicity can be defined as the R-squared from a market model regression of a firm’s returns on the
market’s returns.
4
See Boudoukh et al., (2015) for a discussion of the literature on news arrival and stock price movements.

2
 We explore this question by examining whether the private and public information of firms
with high VIXRSQ contains macroeconomic information. We control for firms’ market beta,
market synchronicity, and firm size to determine if any effects of VIXRSQ are incremental to these
other commonly used measures of macro-connectedness. Specifically, we perform three sets of
analyses. First, we investigate whether the insider trading activity of executives at firms with
higher VIXRSQ reveals more macroeconomic information in that they are more strongly associated
with future aggregate equity returns than insider trades at firms with lower VIXRSQ. Second, we
examine whether the information content from earnings announcements of higher VIXRSQ firms
reveals more information about the aggregate economy. We do this by measuring the incremental
impact of VIXRSQ on the relation between firm-level earnings news and magnitude of the
aggregate market return, aggregate trading volume, and aggregate return volatility in the
announcement window. Finally, we examine whether firm-level changes in components of
profitability for higher VIXRSQ firms reveals more information about aggregate changes in these
components of profitability.
For our insider trading analysis, we use the firm’s annual level of insider stock purchase
intensity as a proxy for firm-specific information revelation over a sample period from 1996 to
2015. Insider’s trades are profitable only when they predict their own firm’s stock returns.
Accordingly, insider trades will only predict aggregate equity returns when the private information
insiders have regarding their own firms is also related to the aggregate economy. Thus, we predict
that that insider trades at firms with higher VIXRSQ will reveal more macroeconomic information,
and hence be more predictive of future aggregate equity returns than insider trades at firms with
lower VIXRSQ. We find evidence suggesting this is the case. Our tests indicate that a one-standard
deviation increase in VIXRSQ will result in an increased level of macro-informativeness from the
interquartile range of insider trades that corresponds to 41 basis points of aggregate market returns
per annum. These results are inclusive of a vector of controls for the equity risk premium (Goyal
and Welch, 2008) and other traditionally used measures of macro-connectedness: size, beta, and
return synchronicity. In fact, while our results document that insider trades at higher VIXRSQ firms
reveal information associated with future one-year aggregate equity returns, insider trades at firms
with higher size, larger beta, and higher historical return synchronicity do not. We perform these
analyses with alternate measures of the aggregate market return and insider trading signal to ensure
that our results are not sensitive to a particular measure of insider buying behavior or return

3
calculation methodology, and we run additional analyses to rule out the possibility that VIXRSQ is
capturing noise or uncertainty instead of macro-connectedness.
Given that VIXRSQ appears to capture the degree to which a firm’s information is
correlated with the macro-economy, we examine the degree to which the earnings announcement
news in higher VIXRSQ firms is more likely to be relevant to the aggregate market. We focus on
earnings announcements because they are a predictable source of firm-specific information flow
that is disclosed by all firms in our sample. Specifically, we examine how VIXRSQ moderates the
impact of the firm’s earnings news around the announcement date on aggregate market returns,
trading volume, and return volatility. We find evidence that earnings news from higher VIXRSQ
firms, measured as the firm’s announcement window returns and earnings surprise, is more
strongly associated with information about aggregate equity markets when compared to lower
VIXRSQ firms. Earnings news from high VIXRSQ firms are more strongly associated with
aggregate equity returns, aggregate trading volume, and aggregate volatility around the earnings
announcement date.
Because VIXRSQ is designed to capture the degree to which a firm’s expected information
flows co-move with the expected information flows of the macro-economy, and because this
information appears to be disclosed with the revelation of earnings, we examine whether firm-
specific profitability news is more strongly related to changes in aggregate profitability for higher
VIXRSQ firms. We investigate aggregate profitability by analyzing the economy-wide return on
equity, ROE, over the full calendar year. We also decompose ROE into its three subcomponents
of ROA and financial leverage, and further decompose ROA into asset turnover ratio and net profit
margin. We take the average of each measure across all firms in our sample to create an aggregate
measure of each component. To test how VIXRSQ affects the degree to which firm-level
profitability signals comove with aggregate profitability components we regress the annual change
of each component of aggregate profitability for the full calendar year on the same measure of
profitability change that the firm reveals during the first quarter of the calendar year.
We find that firms with higher VIXRSQ have firm-level components of profitability that
are more strongly related to aggregate profitability, with results being strongest for measures of
operating profitability, i.e. ROA and net profit margin. These results provide at least a partial
indication as to what type of information makes high VIXRSQ firms more macro-connected.
Furthermore, these results also imply that high VIXRSQ firms can potentially serve as effective

4
bellwethers for the economy’s future profitability, as information revealed in the first quarter of
the calendar year is correlated with information about aggregate profitability over the entire year.
Finally, when taken in conjunction with our insider trading results, these results suggest that the
stronger association between insider trades at higher VIXRSQ firms and future aggregate equity
returns may be driven by the fact that (1) higher VIXRSQ firms have profitability information that
is more strongly correlated with aggregate profitability, and (2) that insiders trade on their own
firm based on their private knowledge of their own firm’s earnings and cash flows, consistent with
prior literature (Ke, Huddart and Petroni 2003; Piotroski and Roulstone 2005).
Our study makes several contributions. It contributes to the existing literature on
macroeconomic indicators by developing a new measure that quantifies a firm’s macro-
connectedness, VIXRSQ, and showing that higher VIXRSQ firms provide macroeconomic
information that is orthogonal to traditional measures of macro-connectedness. Macro-level
information captured by VIXRSQ appears to be at least partially revealed during a firm’s earnings
announcements, which are related to the aggregate profitability of the economy. We also
contribute to the literature on aggregate equity market predictability by showing that insider trades
at higher VIXRSQ firms are more strongly associated with one year ahead aggregate returns than
lower VIXRSQ firms. Finally, we contribute to a burgeoning stream of recent work in both finance
and accounting that suggests that accounting information at the firm level may be useful in
portending future macroeconomic outcomes.
The remainder of our paper is structured as follows. Section 2 discusses prior literature and
develops predictions. Section 3 develops the research design, Section 4 describes the sample, and
Section 5 presents the results. Section 6 concludes the study.

2. Literature Review and Basis for Predictions

2.1. Identification of Macro-Connectedness via Implied Volatilities
The idea of identifying macro-connected firms is not new to either practitioners or
academics. If macro-connected firms have outputs that are expected to be correlated with other
firms, then forward-looking information disclosed by these firms may be potentially useful
indicators of the future direction of a sector or the entire economy. That is, these firms may serve
as economic bellwethers to consumers of macroeconomic information. Anilowski, Feng and

5
Skinner (2007) use size as a proxy for macro-connectedness. Specifically, they use mega-cap
firms, i.e., the twenty firms with the highest market value of equity, and find that management
guidance from these firms is correlated with contemporaneous aggregate equity returns around the
disclosure window. Bonsall, Bozanic, and Fischer (2013) find a similar result to Anilowski et al.
(2007), but construct bellwethers by measuring the correlation between the firm’s performance
and the overall economy over the entire time-series of their sample. Konchitchki and Patatoukas
(2013, 2014) also use a measure of size to measure macro-connectedness. Using the 100 firms
with the highest market capitalization, they find that the components of RNOA at these firms
appears to be correlated with future GDP growth. Hameed, Morck, Shen, and Yeung (2015)
identify industry-connectedness using the combination of high analyst coverage and the degree to
which a firm’s ROA explains the ROA of its peers over a rolling five-year period. They show that
the stock prices of industry peers respond to analysts’ revisions related to the industry-connected
firm.
To the best of our knowledge, there is not a universally accepted method for identifying
macro-connectedness. For example, the selection criteria for the DJIA 30 is ad-hoc and has no
quantifiable components.5 Firm size, measured as the market value of common equity, tends to
have relatively little time-series variation amongst mega-cap firms, thereby making it a relatively
poor choice if the type of information to which financial markets respond is rapidly changing over
time. Elton (1999) concludes in his AFA presidential address stating that realized returns are
unlikely to be a good proxy for expected returns, making measures that are derived from realized
returns such as CAPM betas and market synchronicity potentially suboptimal identifiers of macro-
connectedness.6 Consistent with Elton’s claims, Ashbaugh-Skaife, Lafond, and Gasser (2006),
Teoh, Yang, and Zhang (2009), and Li, Rajgopal, and Venkatchalam (2014) find evidence
consistent with lower market model R-squared’s being more reflective of noise trading versus
information. Regression betas from earnings arise from infrequently occurring data and these
regression coefficients can have high standard errors or require rolling windows of up to five years
or more, resulting in relatively little time-series variation. In addition, both of these beta measures

5
http://www.djindexes.com/averages/
6
In a similar vein, Damodaran (2016) finds that implied equity risk premiums outperform premiums based on
historical returns in predicting future equity risk premiums over the next 1, 5 and 10 years.

6
are created from backwards-looking data that become less relevant as the economy changes over
time.
Our technique for identifying macro-connected firms uses traded option prices and the
Black-Scholes pricing model (Black and Scholes 1973) to estimate implied equity volatilities.
While prior research has documented both stock and options markets to be venues by which
informed traders reveal information to markets (Beaver 1968; Pan and Poteshman 2006; Sinha and
Dong 2011), one likely advantage from using implied volatilities from options markets is the low
level of participation by individual investors.7 Individual investors are more likely to be
unsophisticated and trade for liquidity, behavioral or other reasons unrelated to information content
(Barber and Odean 2008; Gao and Lin 2015). To the extent that such noise trading by individuals
is unpredictable by option market participants, implied volatilities will not reflect it. In addition,
to the extent that option market participants are likely to use the relevant information in realized
stock returns and volatilities, implied volatilities should be better predictors of forward-looking
volatility than realized volatilities.8
Consistent with prior literature (Beaver 1968; Patell and Wolfson 1984; French and Roll
1986; Mitchell and Mulherin 1994) that documents that stock return volatility is related to the
arrival of information about the firm, implied volatilities should reflect the market’s expectations
of future information arrival about the firm. Because we want to identify firms whose expected
information arrivals are strongly correlated with those of the macroeconomy, we quantify firm-
year macro-connectedness by estimating annual firm-level regressions of the daily S&P500 index
implied volatility on the firm’s daily implied volatility. Our variable of interest, VIXRSQ, is the
coefficient of determination, or R-squared, in each yearly regression. If implied volatilities are an
effective measure of anticipated information arrival, then VIXRSQ should represent the amount of
variance in the expected arrival of information to the aggregate stock market that can be explained

7
For example, Lakonishok, Lee, and Poteshman (2004) find that from 1990-2001 total option transaction volume
involving individual investors comprised only 0.01% of all trading volume on the CBOE, while Kaniel, Titman and
Saar (2007) show that total trading dollar volume by individual investors on the NYSE is approximately 4% of total
volume from 2000-2003.
8
While this has been debated in literature with some prior studies (Day and Lewis 1992; Lamoureux and Lastrapes
1993) arguing that implied volatilities are inefficient and biased measures of future volatility, Christensena and
Prabhalab (1998) argue that these studies are methodologically flawed and after correcting for these biases that
implied volatilities outperform realized volatilities in forecasting future volatility. To the extent that implied
volatilities are inefficient and biased measures of future volatility, this would bias us against finding support for our
empirical conjectures.

7
by the particular firm in the given year. Said differently, firms with higher VIXRSQ should have
news that is more relevant to the macro-economy than firms with lower VIXRSQ.
2.2. Using Insider Trades to Validate VIXRSQ
To test whether VIXRSQ effectively measures the macro-connectedness of a firm, we
examine a firm-specific signal and the degree to which VIXRSQ moderates its association with
aggregate economic news. We use insider trading intensity as the firm-specific signal, defined as
the total number of insider shares purchased on the open market divided by the sum of all shares
traded by insiders during the firm’s fiscal year, and 12-month future aggregate equity returns as a
measure of aggregate economic news.
Our choice to use insiders’ trades as an information signal stems from the following: (1)
the majority of extant research on insiders’ informational advantages identifies the nature of
information possessed by insiders to be related to their own firm9,10 (Jaffe 1974; Finnerty 1976;
Seyhun 1986; Jeng, Metrick, and Zeckhauser 2003; Piotroski and Roulstone 2004). (2) Profits
accruing to insiders only come from their own firm’s returns and not the aggregate equity return.
(3) Insider signals have been well-documented in prior literature to be associated with future
returns over long-term horizons (Lakonishok and Lee 2001; Ke, Huddart, and Petroni 2003),
allowing us to observe aggregate returns over a horizon after insiders have already traded. This
rules out the possibility of VIXRSQ capturing macro-connectedness due to reverse causality, i.e.
signals from the aggregate economy are driving the firm-level news. In addition, to the extent that
the firm’s macroconnectedness captured by VIXRSQ is due to a correlated omitted variable that is
not related to firm-level information, the interaction term between insiders and VIXRSQ will be
unlikely to be associated with future aggregate equity returns.11

9
Two exceptions to this stream of literature are Seyhun (1988) and Choudhary, Howe and Lin (1993). These papers
examine whether aggregate insider trades can predict aggregate market returns over a 2 month period using an equally-
weighted return index, and find conflicting results.
10
Other papers, such as Hameed et al. (2015) have used analyst revisions as a forecast medium. However the analyst
literature has shown that analyst information, on average, tends to be common information at the industry and macro-
level (Piotroski and Roulstone 2004), making it a less powerful setting for testing the identification of macro-
connected firms.
11
For example, assume that Home Depot’s value is macroconnected with the aggregate economy through one specific
channel, the demand for new housing starts. While we are unable to ascertain whether insiders at Home Depot have
private information about the demand for new housing starts, insider trades at Home Depot would be unlikely to be
reflective of aggregate returns if they did not have such information.

8
 Taken together, we believe that testing whether VIXRSQ can moderate the association
between insider trades and future aggregate equity returns is a stringent test to validate whether
firms with higher VIXRSQ are more macro-connected. If insiders have information expertise
within their firm that is revealed by their trades, and their firm’s news is correlated with that of the
macroeconomy, then such insider trades should provide information to the aggregate economy.
Hence, we predict that insider buying at higher VIXRSQ firms should be more informative about
future aggregate returns than insider buying at lower VIXRSQ firms. Based on these arguments we
hypothesize (stated in the null form):
H1: The association between insider purchasing intensity and aggregate equity prices does not
differ based on the VIXRSQ of the insider’s firm.

2.3. Examining the Impact of VIXRSQ on Aggregate Market Reactions to a Firm’s Earnings News
Contingent on evidence that VIXRSQ captures the magnitude to which firm-level
information flows are associated with aggregate economy information flows, we next analyze
whether VIXRSQ mediates the degree to which aggregate equity markets react to the public
disclosure of firm-level information. We use the firm’s annual earnings announcement in this case
because earnings announcements are required disclosures by all publicly traded firms and contain
audited and standardized information that pertains directly to the firm’s economics. To the extent
that VIXRSQ effectively measures the amount of firm-level information that is correlated with that
of the aggregate economy, and such macro-connected information is revealed by the firm during
the earnings announcement period, we predict that the aggregate market’s reaction to the firm’s
information disclosure on the announcement date will be more strongly pronounced for firms with
higher VIXRSQ. Based on these arguments we state H2 in the null form:
H2: The association between information disclosed at a firm’s earnings announcement and the
aggregate market reaction does not differ based on the firm’s VIXRSQ.

2.4. Examining the Impact of VIXRSQ on the Co-movement of Firm-Level and Aggregate-Level
Valuation Components
In section 2.3, we conjecture that a firm’s disclosure of news on the earnings announcement
date will be more strongly associated with aggregate market reactions if VIXRSQ is an effective

9
measure of macro-connectedness, and that economy-wide information is disclosed on this date. If
aggregate equity returns reflect economy-wide aggregate changes in fundamental value, then
higher VIXRSQ firms should have changes in fundamental value components that are more
strongly correlated with aggregate changes in the same components. Given that earnings
announcements focus on firm profit, we examine how the association between firm-level
profitability and aggregate profitability is moderated by VIXRSQ. Below, we state H3 in the null
form.
H3: The association between changes in a firm’s profitability and aggregate profitability does
not differ based on the firm’s level of VIXRSQ.

3. Research Design
3.1 Measures of Macro-Connectedness and Insider Trading Signal
Our measure of macro-connectedness, VIXRSQ, is a forward-looking firm-year measure.
It is the coefficient of determination, or R-squared, from annual regressions that estimate the level
of co-movement between anticipated information flows of the firm and the macroeconomy as
specified in Equation (1),

(1) IVm,t   0  1IVi ,t   i ,t

where IVm,t is the daily implied volatility from the S&P500 Index over the upcoming 30 day

timeframe, and IVi ,t is the daily mean implied volatility for all of firm i’s traded options that have a

time to expiration between zero and 60 days. We use 30 day average implied volatilities because
they are the most liquid options, and because the number of available firms in our panel is
considerably reduced when we move to 365 day average time to expirations. The correlation
between 30 day and 365 day implied volatilities in our sample is 0.93 (untabulated). We estimate
the annual regression using all days during a firm’s fiscal year for which data are available.
VIXRSQ is the R-squared from each firm’s annual regression, and it reflects the percent of the
market’s implied volatility that can be explained by the firm’s implied volatility during a given
year. The measure is designed such that firms with higher VIXRSQ have anticipated flows of firm-
level information that are more correlated with anticipated flows of macroeconomic information.

10
 Our measure of insider trading is a firm-level measure based on prior literature that
suggests that insiders reveal more information in their purchases relative to their sales (Lakonishok
and Lee, 2001). On an annual basis, we calculate the insider trading purchase ratio, IT, which is
the total number of shares purchased by all insiders divided by the total number of insider shares
traded in that year. Higher values of IT indicate that insiders have a more positive sentiment
regarding the firm’s future performance.
3.2. Insider Trading, Macro-Connected Firms and Aggregate Equity Returns
Our test of whether higher VIXRSQ firms are more likely to contain information related to
the macroeconomy involves the use of future aggregate equity market returns and IT as a private,
firm-specific mechanism of information revelation. We calculate year-ahead aggregate equity
returns, FUTAGGRET by compounding monthly CRSP value-weighted stock market index returns
over the twelve months subsequent to the fiscal year-end date. We remove the firm’s contribution
to the aggregate return by subtracting out the firm return multiplied by the proportion of the firm’s
market cap to the aggregate market cap to arrive at an ex-firm 12-month aggregate equity return.
We estimate a series of panel regressions, beginning with Equation (2), which illustrate the
main effect of IT on FUTAGGRET after controlling for previously established determinants of the
equity risk premium,

(2) FUTAGGRETi ,t  0  1 ITi ,t  2 DPt  3 DYt   4 EPt  5 SVARt  6 BM t  7 NTISt

 8TBLt  9 LTYt  10 DFYt  11DFRt  12 INFLt   i ,t

where FUTAGGRET-i,t is the ex-firm value-weighted aggregate return, ITi,t is the private firm-
specific mechanism of information revelation described above, and the remainder of the variables
are controls for the equity risk premium from Goyal and Welch (2008) described below. The
literature surrounding the association that insider trading has with future aggregate returns and the
type of nature of information held by insiders is mixed. For example, Seyhun (1988) examines
the aggregate trades of insiders from January 1975 to October 1981 over an eight week period and
finds them to be correlated with future market-wide equity returns, implying that insiders may
possess common information. Conversely, Choudhary et al. (1993) use a vector autoregressive
model and find that investors cannot use aggregate insider transactions to profitably predict future
market returns over the next eight weeks. Piotroski and Roulstone (2004) conclude that insiders,
on average, disclose significantly more firm-specific information in their trades than information

11
that is common to many firms. Furthermore, neither Seyhun (1988) nor Choudhary et al. (1993)
use value-weighted returns, nor do they control for expectations in the equity risk premium. Thus,
we have no prediction for the coefficient on 1 , i.e., whether insider trades across all firms are
correlated with 12-month ahead value-weighted returns. Rather, we use the analyses from
Equation (2) in tandem with our other specifications to make inferences about the incremental
macroeconomic information revealed by insiders at higher VIXRSQ firms.
We control for a number of aggregate-level factors when estimating the aggregate expected
return to ensure that our variable of interest is not identifying changes in the equity risk premium.
DP is the log dividend-price ratio, DY is the log dividend yield, EP is the log earnings-price ratio,
RVOL is the volatility of excess stock returns, BM is the book-to-market value ratio for the Dow
Jones Industrial Average, NTIS is net equity expansion, TBL is the interest rate on a three-month
Treasury bill, LTY is the long-term government bond yield, LTR is the return on long-term
government bonds, DFY is the difference between Moody’s BAA- and AAA-rated corporate bond
yields, DFR is the long-term corporate bond return minus the long-term government bond return,
and INFL is inflation calculated from the CPI for all urban consumers. All variables are annual
averages of monthly measures and have been graciously provided to us by Amit Goyal. 12 Further
details on the calculation of each variable are in Appendix A.
We examine the incremental level of macro-connectedness for firms with higher VIXRSQ
on FUTAGGRET by estimating Equation (3).

(3) FUTAGGRETi ,t   0  1 ITi ,t   2VIXRSQi ,t  3 IT VIXRSQi ,t   4 DPt  5 DYt

  6 EPt   7 SVARt  8 BM t  9 NTISt  10TBLt  11LTYt
 12 DFYt  13 DFRt  14 INFLt   i ,t

Our prediction is that  3 is positive, i.e., that insider trades at higher VIXRSQ firms reveal more
macroeconomic information than insider trades at lower VIXRSQ firms and are hence more
positively correlated with future aggregate equity returns. We make no specific predictions
regarding the coefficients of 1 and  2 .

Finally, we examine the effect of IT VIXRSQ on future aggregate returns while

controlling for the interaction effects from previously used proxies for macro-connectedness as

12
http://www.hec.unil.ch/agoyal/docs/PredictorData2016.xlsx

12
shown in Equation (4). The purpose of these additional controls is not to determine if insider trades
at high VIXRSQ firms have more predictive power than those identified by previously used proxies,
but rather to test whether the macro-level information captured by higher VIXRSQ firms and
revealed by insider trades is incremental to these previously used proxies.

 4 FUTAGGRET i ,t   0  1 ITi ,t   2VIXRSQi ,t  3 ITi ,t  VIXRSQi ,t   4 LOGSIZEi ,t

 5 ITi ,t  LOGSIZEi ,t   6 MKTBETAi ,t   7 ITi ,t  MKTBETAi ,t
 8 MKTSYNCi ,t  9 ITi ,t  MKTSYNCi ,t  10 DPt  11 DYt  12 EPt
 13 SVARt  14 BM t  15 NTISt  16TBLt  17 LTYt  18 DFYt
 19 DFRt   20 INFLt   i ,t

LOGSIZE is the log of the firm’s market value of equity as of the end of the fiscal year. MKTBETA
is the annual regression coefficient on market return from a CAPM market model regression over
the fiscal year using daily returns, and MKTSYNC is the annual R-squared from the same
regression. While we do not make any specific predictions for the coefficients  4 through  9
because of multicollinearity, to the extent that higher levels of SIZE, MKTBETA, and MKTSYNC
are orthogonal measures of macro-connectedness, and to the extent that insiders are willing to
reveal private information through their trades, the coefficients on  5 ,  7 and  9 should be
significantly greater than zero. To the extent that higher VIXRSQ firms contain incremental
macroeconomic information to LOGSIZE, MKTBETA, and MKTSYNC and to the extent it is
revealed by insider trades,  3 will be significantly greater than zero.

3.3. Macro-Connected Firms and Aggregate Market Reactions at Earnings Announcements

Our test of whether aggregate market reactions at earnings announcements are stronger for
higher VIXRSQ firms involves the estimation of equations (5) and (6):

(5) AGG _ MKTRXN i ,t   1EA _ NEWSi ,t   2VIXRSQi ,t   3 EA _ NEWS VIXRSQi ,t

 FirmFE '   i ,t

(6) AGG _ MKTRXN  i ,t   0   1 EA _ NEWSi ,t   2VIXRSQi ,t   3 EA _ NEWS VIXRSQi ,t

  4 LOGSIZEi ,t   5 EA _ NEWSi ,t  LOGSIZEi ,t   6 MKTBETAi ,t
  7 EA _ NEWSi ,t  MKTBETAi ,t   8 MKTSYNCi ,t
  9 EA _ NEWSi ,t  MKTSYNCi ,t  FirmFE '   i ,t

13
Both estimations require (1) measures of the aggregate market reaction, AGG_MKTRXN, over the
announcement window, which we define as day t-1 to day t+1, where firm i’s earnings are
announced on day t, and (2) measures of the magnitude of news at the firm’s earnings
announcement, EA_NEWS. For (1) our aggregate market reaction metrics include the aggregate
market return, AGG_EARET, aggregate trading volume, AGG_TURN, and aggregate volatility,
AGG_VOLAT, during the announcement window. We calculate AGG_EARET as the value-
weighted market return over the announcement period excluding firm i, AGG_TURN, as the mean
of aggregate turnover (volume divided by shares outstanding) excluding firm i over the
announcement period, and AGG_VOLAT as the sum of the squared daily market returns over the
announcement period, excluding firm i, divided by the volatility of market returns, excluding firm
i, over the 30-day period prior to the earnings announcement period. For (2), we use the
announcement return, EARET, and the analyst earnings surprise ESURP as measures of earnings
news. EARET is the firm’s announcement return over the three-day announcement window, and
ESURP is the actual earnings per share minus the mean analyst estimate of earnings per share for
the fourth quarter earnings announcement, scaled by analyst dispersion, prior to the announcement
period. When the dependent variables are unsigned measures of the aggregate market reaction,
i.e. AGG_VOLAT and AGG_TURN, we use the absolute value of the two earnings measures,
ABS_EARET and ABS_ESURP as our measures of earnings news. Equation (6) replicates equation
(5) with additional controls for traditionally used measures of macroconnectedness. If information
disclosed on the earnings announcement date is more strongly correlated with aggregate market
reactions for higher VIXRSQ firms, we expect  3 to be significantly greater than zero.

3.4. Macro-Connected Firms and Aggregate Changes in Profitability Components

Our tests on whether higher VIXRSQ firms contain profitability signals that are more
connected with aggregate profitability are motivated by our previous conjectures in section 3.3,
that earnings related news will be more strongly correlated with aggregate market reactions for
higher VIXRSQ firms, as well as the fact that our primary vector of control variables in equation
(3) is related to factors that drive the equity risk premium, thereby implying that comovements in
profitability are likely to be captured by VIXRSQ. Thus, we test whether the firm-level information
in higher VIXRSQ firms is more strongly associated with future aggregate profitability.
Specifically, we examine how VIXRSQ moderates the degree to which a firm’s change in

14
profitability is associated with aggregate profitability for the full calendar year, as shown in Figure
1. Our empirical tests follow the specifications in Equation (7) and (8):

(7) AGG _ PROFITti,t3   0  1FIRM _ PROFITi ,t   2VIXRSQi ,t

  3FIRM _ PROFITi ,t VIXRSQi ,t   i ,t

(8) AGG _ PROFITti,t3   0  1FIRM _ PROFITi ,t   2VIXRSQi ,t

  3FIRM _ PROFITi ,t VIXRSQi ,t   4 LOGSIZEi ,t
  5 FIRM _ PROFITi ,t  LOGSIZEi ,t   6 MKTBETAi ,t
  7 FIRM _ PROFITi ,t  MKTBETAi ,t   8 MKTSYNCi ,t
  9 FIRM _ PROFITi ,t  MKTSYNCi ,t   i ,t

∆AGG_PROFIT is the economy-wide average annual change in profitability over the full calendar
year, exclusive of firm i, measured as the firms’ return on equity, ROE. In addition, we further
explore which specific subcomponents of ROE maybe most strongly related to the macroeconomy.
We use a DuPont decomposition to decompose the firm’s ROE into operating profitability,
measured as the firms’ return on assets and financial leverage, and then decompose the firm’s ROA
into asset turnover ratio and net profit margin as shown in Equation (9).
ROA

 NetIncome   NetIncome  Sales   TotalAssets 

(9)     
 ShareholdersEquity   Sales  TotalAssets   ShareholdersEquity 
ROE PROFIT _ MGN ASSET _ TURN Leverage

ROE is calculated as the firm’s net income scaled by its book value of equity. ROA is calculated
as net income scaled by book value of total assets. ASSET_TURN is the firm’s asset turnover ratio,
calculated as sales revenue scaled by book value of total assets. PROFIT_MGN is the firm’s net
profit margin, calculated as net income scaled by sales revenue. LEV is the firm’s financial
leverage, calculated as the book value of assets scaled by the book value of equity. Net income
and sales revenue are over the quarter and total assets and book value of equity are as of the last
day of the quarter. Net income is exclusive of discontinued operations and extraordinary items.
∆FIRM_PROFIT is the analogous change in the firm’s quarterly profitability component
announced in the first calendar quarter of the year. If higher VIXRSQ firms have profitability
metrics that are more correlated with profitability metrics for the aggregate economy, we expect
 3 to be significantly greater than zero in our empirical tests of equations (7) and (8).

15
4. Sample and Descriptive Statistics
We construct our sample of 23,758 firm-years for estimating equations (2), (3), and (4) and
our sample of 31,988 firm-years for estimating equation (5) using the intersection of Compustat
and CRSP firms. We require a December 31 fiscal year-end to align the firms’ fiscal years in time
and eliminate overlapping return periods. We also require a beginning-of-year stock price greater
than $5, and total assets, total book equity, and total sales over $5 million to reduce the effect of
very small firms. Further, we require non-missing changes in components of intrinsic value, i.e.,
non-missing changes in ROA, ASSET_TURN, PROFIT_MGN, LEVERAGE, and ROE. To
calculate VIXRSQ, firms must be in the Options Metrics database and have at least 30 days during
the fiscal year for which the average implied volatility of traded options with time to expiry of
between zero and sixty days can be determined. Because the Options Metrics data begins in 1996,
our sample starts in that year. Our sample for estimating equations (2), (3), and (4) is smaller than
our sample for estimating other equations because those estimations require non-missing IT,
meaning that firms must also be included in the Thomson Reuters Insider database for a given
year. Aggregate measures of ROA, ASSET_TURN, PROFIT_MGN, LEVERAGE, and ROE are
constructed using all Compustat firms in order to ensure a wide coverage of firms. Aggregate
returns are calculated using the aggregate value-weighted market returns provided by CRSP.
Aggregate turnover is calculated using all firms in CRSP with non-missing volume and shares
outstanding. All continuous variables are winsorized at the top and bottom 1%.
Because our research design uses firm-level variables to predict aggregate stock returns
and aggregate intrinsic value factors, we split the summary statistics by the level of aggregation.
Table 1, Panels A, B and C present descriptive statistics for firm-level variables.13 Table 1, Panel
A shows the univariate summary statistics for these variables. The median firm has a VIXRSQ of
0.11, with an interquartile range between 0.02 and 0.32. The mean value of IT is 0.21, consistent
with the prior literature that shows that insider sales outnumbers insider purchases, likely due to
the fact that insiders are often granted shares as compensation and rebalance their portfolios to
avoid over-investing in their own firms. The median firm in our sample has a LOGSIZE value of
14.28, which is roughly 1.59 billion dollars in market capitalization, with the upper and lower
quartile firms having market capitalization of 4.59 billion and 592 million dollars. The mean and

13
AGG_EARET, AGG_VOLAT, and AGG_TURN are included in the firm-level summary statistics because they vary
by firm-year, and therefore their summary statistics are more comparable to other firm-year measures.

16
median MKTBETA, the one-year beta determined using daily returns from a CAPM regression, in
our sample are 1.09 and 1.02. Taken together, these statistics suggest that our sample is relatively
representative of the overall economy in terms of market cap and systematic risk.
Panel B examines the bi-variate correlations across the firm-level variables. Our primary
measure of macro-connectedness, VIXRSQ, is strongly correlated with MKTSYNC (ρ = 0.45),
MKTBETA (ρ = 0.23), and LOGSIZE (ρ = 0.07). This is unsurprising given that these variables
have been used in prior studies as proxies for macro-connectedness. Insider purchases, or IT, are
most strongly correlated with contemporaneous indicators of poor profitability such as ROE (ρ =
-0.16), ROA (ρ = -0.18), PROFIT_MGN (ρ = -0.11), and ASSET_TURN (ρ = -0.08). IT is also
negatively correlated with LOGSIZE (ρ = -0.24). These results are consistent with Rozeff and
Zaman (1998) who document that insiders are contrarians who purchase stock in their own firm
following poor performance. Panel C displays an autocorrelation matrix for VIXRSQ. The
correlations show autocorrelative decay and evidence of significant time-series variation, with ρ
= 0.42, 0.09, -0.08, and -0.19 for 1, 2, 3 and 4-year lags of VIXRSQ, respectively.
In Figure 2, we examine the characteristics of VIXRSQ for Dow Jones Industrial Average
(DJIA) 30 firms in the last year of our sample, 2015. While the selection process for the DJIA 30
is unknown, the firms selected are done so with the purpose of serving as indicators for the U.S.
economy. Thus, assuming VIXRSQ is an effective measure of macroconnectedness, we would
expect these firms to have a VIXRSQ that is significantly higher than average. The top three
VIXRSQ firms in the 2015 DJIA 30 sample are amongst the largest investment banks in the world
(JP Morgan, Citigroup and Goldman Sachs), firms whose revenues and net income should be
strongly tied to expected macroeconomic growth. All but one firm in the DJIA 30 index has a
VIXRSQ greater than the median for that year, with half of these firms being above the 95 th
percentile.
Table 2, Panel A provides the univariate descriptive statistics for the aggregate variables.
The one-year ahead aggregate return, or FUTAGGRET, has a mean of 0.10, suggesting annual
aggregate returns to the market of about 10% over the sample period. Aggregate ROA,
AGG_ROA, has a mean of 0.01 and a median of 0.02, suggesting that over the sample period, the
market as a whole showed profitability. The median aggregate profit margin,
AGG_PROFIT_MGN, is positive in our sample, at 0.07, however, the mean is negative, at -0.02,
suggesting left-skewness in the distribution consistent with the presence of periods of crisis. Asset

17
turnover, AGG_ASSET_TURN, has a mean of 0.76 suggesting that aggregate revenue is about 76%
of aggregate assets in place. Aggregate ROE, AGG_ROE, shows wider variation than aggregate
ROA, with a standard deviation of 0.08 for ROE compared to a standard deviation of 0.03 for
aggregate ROA. This is consistent with ROE reflecting the effect that leverage has on the
profitability.
Table 2, Panel B provides the bi-variate correlations of the aggregate variables. Of note
are the correlations between the one-year ahead aggregate returns, FUTAGGRET, and the control
variables from Goyal et al. (2008). These correlations range from -0.30 to 0.47 and all have a
magnitude of more than 0.10 with the exception of NTIS and PE. This suggests that the controls
for the equity risk premium appear to be capturing the components of risk that manifest in future
aggregate returns.

5. Results and Discussion

5.1. VIXRSQ and the Association between Future Aggregate Returns and Insider Trades
Table 3 presents results of regression analyses of one-year ahead aggregate returns,
FUTAGGRET, on VIXRSQ and IT. Column 1 reports the panel regression outputs from Equation
(2), and finds that the coefficient on IT is positive but insignificant, 1 =0.004 (t-stat = 0.88),
indicating that insider purchases, unconditionally, do not reveal macroeconomic information. The
key finding in column 2, which reports results from Equation (3), is that the coefficient on the
interaction between IT and VIXRSQ,  3 , is positive and significant (  3 =0.068, t-stat = 2.33) as
predicted in H1.
Column 3 reports results from Equation (4), which includes the interaction between IT and
VIXRSQ, the vector of equity risk premium controls, and the main effects and additional interaction
effects between IT and previously used proxies for macro-connectedness. Again we find a positive
and significant coefficient on the interaction between IT and VIXRSQ (  3 = 0.072, t-stat = 2.28),
after controlling for previously used proxies for macro-connectedness. The interaction coefficient
between IT and LOGSIZE is  5 = -0.003 (t-stat = -1.28), IT and MKTBETA is  7 = -0.017 (t-stat

= -1.26), and IT and MKTSYNC is  9 = 0.006 (t-stat = 0.16). The result suggests that insider trades
at high VIXRSQ firms reveal macroeconomic information that is orthogonal to the information

18
identified by size, systematic risk, and realized return synchronicity. The coefficient on IT, 1 =
0.046 (t-stat = 1.15) is insignificant in the presence of the additional controls, implying that
macroeconomic information released by insiders appears to be limited to insiders at firms with
higher VIXRSQ. The coefficient on the main effect of VIXRSQ,  2 remains insignificant (t-stat =

-1.51). We interpret the economic meaningfulness of  3 in column 3 by examining the increase

in an insider trading portfolio that is long (short) the top (bottom) quartile of insider purchases for
the median firm in our sample, i.e. a firm with the mean size, beta, synchronicity and VIXRSQ for
our sample, and then examine the increase in association with future aggregate equity returns for
a firm with mean size, beta, synchronicity, but a one standard deviation increase in VIXRSQ. We
find that the increase in macro-information from these insiders increases from 2.5 to 44 basis
points, i.e. a 41.5 basis point increase in macro information is revealed by insiders when VIXRSQ
is higher by one standard deviation. Collectively, these analyses are consistent with insider
purchases at higher VIXRSQ firms revealing more information about the macroeconomy, thus
resulting in a stronger association with future aggregate equity returns.
5.1.1. Alternate Methodology of VIXRSQ as a Measure of Macroinformativeness
In addition to our main analyses of Equations (3) and (4), for each year in our sample, we
calculate ITi,t, VIXRSQi,t, the interaction between ITi,t, and VIXRSQi,t. We average the variables for
each year such that we have one observation for AGGITt, AGGVIXRSQt and the interaction of the
two variables, AGGIT_VIXRSQt.. AGGIT_VIXRSQ can be interpreted as an aggregate weighted
signal that reflects insiders’ information about future expectations, where insiders that are more
macroconnected are weighted more heavily in the calculation. There are both advantages and
disadvantages of this empirical design. The primary advantage is that all of the independent
variables are now aggregated cross-sectional variables, matching the dependent variable, the
aggregate return. The disadvantage of this empirical design is that the sample size becomes
extremely small, i.e. a sample size of twenty observations, one for each year from 1996 to 2015.
This results in a large loss of statistical power and degrees of freedom, making it challenging to
add controls for the equity risk premium without creating a singular or near-singular matrix of
data. To control for aggregate returns explained by changes in the market’s expected return, we

19
subtract an estimate of the implied equity risk premium14 and the 10-year treasury bond from the
12 month future aggregate market return when calculating our dependent variable,
ADJFUTRET_ABNt.

Table 4 reports results of the aggregated analyses. Column 1 reports the regression using
only the main effects, AGGIT and AGGVIXRSQ. Neither variable is significant, and the R-squared
of the regression is 0.04. Column 2 adds the interaction term AGGIT_VIXRSQt. The coefficient
of the interaction effect is 11.70 (t-stat = 2.66), while the R-squared increases to 0.34. Figure 3
shows graphical representations of the year-by-year results from the Table 4 regressions. In 13 of
20 years, the interaction term AGGIT_VIXRSQ increases the degree to which AGGIT is associated
with ADJFUTRET_ABN over the use of only the fitted value from only the main effects, AGGIT
and AGGVIXRSQ. These results corroborate our main results in Table 3, that insider trades at
higher VIXRSQ firms reveal more macroeconomic information, i.e., they are more strongly
associated with future aggregate equity returns.

5.1.2. Alternate Analyses Addressing Uncertainty and VIXRSQ

We also include additional analyses to address a potential alternate interpretation of
VIXRSQ. The literature that has debated the extent to which lower R-squared values from
regressions of realized market returns on realized firm returns are more reflective of firm-specific
information versus noise or uncertainty. In light of this debate, we address the possibility that
higher VIXRSQ reflects the co-movement of firm and market implied volatilities caused by noise
and uncertainty, and not the anticipated arrival of information for both the firm and the market.
While we are unaware of a mechanism by which this alternate interpretation of VIXRSQ would
result in 1) an increased correlation between the firm’s intrinsic value factors and the market’s
intrinsic value factors, and 2) an increased correlation between insider purchases and future
aggregate stock returns, we nonetheless design a set of analyses to address this possibility.
If VIXRSQ is a measure of aggregate uncertainty then we expect that the result suggesting
that insider trades at higher VIXRSQ firms are more predictive of future aggregate returns will be

14
Implied equity risk premiums are provided by Aswath Damodaran on his NYU website. Assumptions to estimate
the implied equity risk premium include a 2-stage free cash flow to equity model, with a 5 year high-growth period
prior to steady state growth. Analysts estimates of the SP500 are used to calculate expected earnings, and expected
free cash flows to equity are calculated using a trailing twelve month modified payout ratio that includes share
repurchases. The ten year treasury bill is used for the risk-free rate and the terminal growth rate.

20
attenuated after controlling for aggregate uncertainty. Conversely, if VIXRSQ is a measure of firm-
specific uncertainty, we expect that insider trades at higher VIXRSQ firms will be able to reveal
more firm-specific information due to the impoverished information environment and therefore
become more predictive of firm-level returns.
We use three measurements of macro-level uncertainty, YRVIX, EQUITY_MKT_U, and
ABS_BW_SENT, which are determined by three different methods. YRVIX is the average annual
implied market volatility from CBOE options markets. EQUITY_MKT_U is a measure of equity
market uncertainty from Baker, Bloom, and Davis (2016) based on textual analysis of news articles
containing words related to ‘uncertainty,’ ‘economy,’ and ‘equity market.’ ABS_BW_SENT is a
scaled absolute measure of Baker and Wurgler’s (2006) investor sentiment index, which considers
uncertainty to be high when investor sentiment is extremely bearish or bullish.
Table 5 reports summary statistics for regression analyses of Equation (4) using the
additional controls for macro-level uncertainty. Column 1 includes the three additional controls
as main effects, and Column 2 includes these three additional controls, plus their interactions with
IT. Column 1 shows that the coefficient on the interaction IT∙VIXRSQ,  3 = 0.056 (t-stat = 2.89)
remains significant after controlling for macro-level uncertainty. Column 2 finds similar results,
with the coefficient on IT∙VIXRSQ,  3 = 0.036 (t-stat = 2.40). Two other findings from these
analyses are worth noting. The first is that on average, higher uncertainty over the year appears to
predict lower aggregate returns over the subsequent year. That is, the coefficients of all three
measures of aggregate uncertainty are negative in Column 1, with the coefficients on YRVIX, -
11.084, and ABS_BW_SENT, -0.087, statistically significant (t-stats of -4.20 and -1.80). The
second is that none of the interactions between IT and the three proxies for uncertainty are
significant, with the coefficients on IT∙YRVIX, IT∙EQUITY_MKT_U, and IT∙ABS_BW_SENT
having t-stats of 1.02, -0.48, and 1.13. Accordingly, it does not appear that VIXRSQ captures
aggregate uncertainty, and to the extent that it does, aggregate uncertainty itself does not appear to
increase the ability of insider trades to predict aggregate equity returns.
Table 6 reports summary statistics for regressions that analyze the effect of VIXRSQ on
firm-level returns. Our dependent variable is the one-year ahead excess firm return, ADJFUTRET,
which we calculate as the firm’s 12-month buy-and-hold stock return less the compounded value-
weighted market return over the same period. Following Rozeff and Zaman (1998), we control

21
for the book-to-market ratio, BM, and the firm’s current year annual returns, ANNFIRMRET. In
addition, we control for the interaction between IT and LOGSIZE because Lakonishok and Lee
(2001) document that the predictive power of insider purchases is concentrated in small firms.
Column 1 of Table 5 confirms prior findings that IT is predictive of ADJFUTRET, with a
coefficient on IT of 0.386 (t-stat = 2.57). Consistent with prior studies, the effect of IT is attenuated
for larger firms, as indicated by a negative and significant coefficient on IT∙LOGSIZE (coefficient
= -0.025, t-stat = -2.28). Column 2 adds the interaction of IT∙VIXRSQ to the specification in
Column 1. If VIXRSQ represents higher uncertainty attributable to a lack of firm-specific
information, then insider trades should be more predictive firm returns when VIXRSQ is higher,
consistent with a higher coefficient on IT∙VIXRSQ. In contrast, the coefficient on IT∙VIXRSQ is
insignificant (coefficient = 0.085, t-stat = 1.10), which is inconsistent with VIXRSQ capturing firm-
level uncertainty. In Column 3 we add MEANFIRMIV, the firm’s average daily implied volatility
during the year, and its interaction with IT, to the specification in Column 2. If MEANFIRMIV
measures firm-level uncertainty, then we expect the interaction IT∙MEANFIRMIV to be positive
and significant, consistent with firm-level uncertainty increasing the predictive power of insider
trades for firm returns. Indeed, we find a positive and significant coefficient on IT∙MEANFIRMIV,
0.255 (t-stat = 2.86), while the coefficient on IT∙VIXRSQ remains insignificant (coefficient = 0.071,
t-stat = 0.91). Thus, our results are consistent with prior literature that insider trades are more
profitable when firm-level uncertainty is higher, and do not appear consistent with VIXRSQ
capturing firm-level uncertainty.
5.1.3. Alternate Measures of Macro-Connectedness, Insider Trades, and Future Aggregate Equity
Returns
To ensure that our main set of results in Section 5.1 are not driven by specific measures of
the dependent variable, FUTAGGRET, or the interaction of interest, IT∙VIXRSQ, we re-estimate
our main findings using alternate measures of each of these variables. In Table 7, Panel A, we
report regression results using 12-month ahead ex-firm equal-weighted returns, FUTAGGEWRET
as the dependent variable. Both coefficients on IT∙VIXRSQ remain significant, with  3 =0.091 (t-

stat = 2.46) and  3 =0.100 (t-stat = 2.43). Because equal-weighted returns are more strongly
driven by smaller and midcap firms relative to value-weighted returns, these results suggest that

22
the insider trades at higher VIXRSQ firms appear to reveal economic information that is pertinent
to firms with both larger and smaller market capitalizations.
In Table 7, Panel B, we calculate an alternate measure of macro-connectedness,
VIXRSQ_R, as the tercile rank of VIXRSQ taken across the entire cross-section of firms each year.
VIXRSQ_R can potentially provide different inferences from VIXRSQ if there exists time-series
variation in the cross-sectional average of VIXRSQ within our sample of firms. We find that both
coefficients on IT∙VIXRSQ remain significant, with  3 =0.006 (t-stat = 2.36) and  3 =0.007 (t-stat
= 2.10), giving us comfort that our panel regression inferences are robust across a non-parametric
year-rank measure.
Table 7, Panels C and D present alternate versions of our main insider trading measure, IT.
IT_TXN measures insider purchase intensity similarly to IT, except that it is calculated as the total
number of insider purchase transactions divided by the total number of all insider transactions in
a given year. IT_TXN removes the information content in total trade size because the number of
shares purchased by each insider is not incorporated in the measure. Conversely, IT_BET
measures insider sentiment factoring in the size of each insider’s trade relative to his or her total
holdings.15 Thus, IT_BET is a weighted average measure of insider sentiment that takes into
account the insider’s confidence in his or her future private information as a function of transaction
size. The interaction coefficients between IT_TXN and VIXRSQ are  3 =0.033 (t-stat = 2.56) and

 3 =0.034 (t-stat = 2.39), while the interaction coefficients between IT_BET and VIXRSQ are  3

=0.084 (t-stat = 2.11) and  3 =0.082 (t-stat = 2.08), indicating that our results are insensitive to
alternative measures of insider trading.
Overall, our main result that insider trades at firms with higher VIXRSQ are more strongly
associated with future aggregate returns are insensitive to alternate measures of IT, VIXRSQ, or
FUTAGGRET. It is also worth noting that that none of the interaction coefficients for the
traditionally used measures of macro-connectedness are positive and significant in any of our main
analysis or robustness tests. This could be attributable to the fact that these characteristics are

15
Specifically, IT_BET is calculated for each insider transaction as the signed percentage of shares either bought or
sold in the given transaction. For example, an insider who currently owns 100 shares, and purchases another 50 shares
would receive a transaction score of 0.5, where an insider who sells his or her entire portfolio of 100 shares would
have a transaction score of -1.0. Each transaction score is then multiplied by the number of shares traded, summed
together, then scaled by the total number of shares traded over the entire year.

23
inferior identifiers of macro-connectedness, because insiders at large, high-beta, high-
synchronicity firms have less incentives to reveal private information in their trades due to an
increased fear of litigation risk, or because insiders at these firms hold very little private
information because their stock prices are more informationally efficient.
5.2. VIXRSQ and Aggregate Equity Market Reactions to a Firm’s Earnings News
Table 8, Panels A, B and C present results of regression analyses from equations (5) and
(6), which test whether aggregate market reactions will react more strongly to news revealed at
earnings announcements for higher VIXRSQ firms. All three panels include two measures of the
earnings news as the independent variable, based on (1) the firm’s announcement period return
and (2) an analyst based earnings surprise. For each type of earnings news, we estimate regressions
both with and without the additional measures of macroconnectedness, i.e., beta, size and return
synchronicity, so that we can examine whether any additional macroconnectedness revealed by
earnings news for higher VIXRSQ firms is orthogonal to these measures.
Overall evidence from Panel A suggests that higher VIXRSQ firms release news, measured
as EARET or ESURP on the earnings announcement date, that is more positively associated with
the aggregate equity return, AGG_EARET, over the same period. Panels B and C show that
unsigned measures of earnings news, measured as ABS_EARET and ABS_ESURP, are more
strongly associated with unsigned measures of aggregate information content, AGG_VOLAT and
AGG_TURN.

Across the three panels and twelve columns, ten of the columns show that  3 , the

coefficient on the interaction term EA _ NEWS VIXRSQ is positive and significant. The
magnitude of the coefficient is somewhat attenuated when EA _ NEWS  MKTSYNC is included
in the regression in columns 3, 7 and 11. This is most likely due to the fact that MKTSYNC is
measured over the identical period where earnings is measured, reflecting prior papers that have
demonstrated the relation between annual returns and earnings news (Easton and Harris 1991; Ali
and Zarowin 1992). Regardless,  3 remains positive and significant, implying that the the
information captured by VIXRSQ appears to be orthogonal to that of MKTSYNC and the other
measures of macro-connectedness. The two exceptions where the coefficient on
EA _ NEWS VIXRSQ is insignificant are in columns 4 and 10, with t-statistics for  3 = 1.59 and

1.36, respectively. Given that the sample size for the regressions where ESURP is used as the

24
EA_NEWS is significantly smaller, i.e. about 25% fewer observations, it is possible that the loss
of significance is due to sample size issues. Overall, the evidence from sections 5.1 and 5.2
supports H2, that firms with higher VIXRSQ appear to have information which is more correlated
with the macroeconomy, with at least a portion of this macrocorrelated information being revealed
at the earnings announcement date.
5.3. VIXRSQ and the Relation between Aggregate and Firm Level Profitability
Table 9 reports regression coefficients from equation (7) and (8), which regresses average
changes in aggregate profitability components for the year on firm-level changes in profitability
components that are released in the first quarter of the calendar year. The variable of interest is
 3 , the interaction between ∆FIRM_X and VIXRSQ.  3 reveals the association between the
change in the firm’s profitability in the first quarter with the aggregate profitability of the economy
for the full calendar year, and how this varies with VIXRSQ.
Columns 1 through 5 represent the components from a basic Dupont decomposition of
ROA, where X = ROA, PROFIT_MGN, ASSET_TURN, LEVERAGE, and ROE while columns 6
through 10 examine the same regression specification with additional controls for LOGSIZE,
MKTBETA, and MKTSYNC. Across all columns in 1-5, we find  3 to be positive and significant,
with the comovement in fundamentals being strongest for operating profitability components of
ROE, i.e., ROA and net profit margin. The coefficient of interest for ROA,  3 = 0.256 (t-stat =

3.86), for PROFIT_MGN  3 = 0.073 (t-stat = 5.03), for ASSET_TURN  3 = 0.063 (t-stat = 2.15),

LEV  3 = 0.052 (t-stat = 2.11), and ROE  3 = 0.180 (t-stat = 2.22). Across columns 6 through 10,
where interaction regressors are included, higher VIXRSQ firms appear to provide information
related to ROA and net profit margin, ROA  3 = 0.167 (t-stat = 2.70) and PROFIT_MGN  3 =
0.053 (t-stat = 3.26) that is orthogonal to that captured by other traditional bellwethers.
Coefficients on ASSET_TURN, LEV, and ROE are directionally correct but insignificant in
columns 8, 9 and 10. Overall, Table 9 provides evidence in support of H3. Higher VIXRSQ firms
have changes in firm-level profitability that appear to be more associated with changes in aggregate
level profitability when compared with lower VIXRSQ firms, with information related to operating
profitability and net profit margins being incremental to traditional measures of macro-
connectedness.

25
6. Conclusion
We propose a new method of capturing a firm’s level of macro-connectedness. Our
variable, VIXRSQ, is the R-squared from firm-level annual regressions of the aggregate market
daily implied volatility on the firm’s daily implied volatility. Using data from 1996 to 2015, we
document that insider trades at higher VIXRSQ firms are more strongly associated with 1-year
ahead value-weighted aggregate equity returns than insider trades at firms with lower VIXRSQ.
The macro-level information revealed by firm-specific insider trades at these higher VIXRSQ firms
orthogonal to information revealed by insiders at firms with high market cap, beta, and
synchronicity. We execute additional analyses to rule out the possibility of noise or uncertainty
driving our results, and we also show that our results are robust to alternative measures of insider
trading, VIXRSQ, and aggregate returns.
These results imply that insiders at higher VIXRSQ firms reveal private information related
to their own firm, and that the information revealed about their own firm is more strongly
correlated with that of the aggregate market. We find evidence that at least some of this macro-
information at high VIXRSQ firms is revealed on the earnings announcement date. Specifically,
earnings news from higher VIXRSQ firms, measured as the firm’s announcement window returns
and earnings surprise, is more strongly associated with aggregate equity returns, trading volume,
and return volatility around the earnings announcement date.
Finally, motivated by evidence that firms with higher VIXRSQ reveal more macro-level
information via insider trades and earnings news, we hypothesize and document that changes in
measures of firm-specific profitability are more strongly related to changes in aggregate
profitability for higher VIXRSQ firms. Higher VIXRSQ firms have first quarter firm-level
profitability components of ROE that are more strongly related to aggregate profitability
components of ROE over the full calendar year, with the strongest macro-connections coming from
ROA and net profit margin. Taken together, our results provide evidence that high VIXRSQ firms
can serve as effective bellwethers to financial markets by providing information about aggregate
equity returns and aggregate profitability.

26
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 Appendix
This appendix lists control variables used in regression specifications based on Equations (3) and (4). All
variables and data were graciously provided to us from Amit Goyal’s website. We calculate monthly
averages each year as annual controls in our regression specifications.
DP: Dividend Price Ratio is the difference between the log of dividends and the log of prices. Dividends
are 12-month moving sums of dividends paid on the S&P500 index. Stock returns are the continuously
compounded returns on the S&P 500 index, including dividends.

DY: Dividend Yield is the difference between the log of dividends and the log of lagged prices

EP: Earnings Price Ratio is the difference between the log of earnings and the log of prices. Earnings are
12-month moving sums of earnings on the S&P500 index. Earnings are estimates by Goyal and Welch
based on the interpolation of quarterly earnings by the S&P corporation.

SVAR: Stock Variance is computed as sum of squared daily returns on the S&P 500 from CRSP.
BM: Book-to-Market Ratio is computed as the ratio of book value to market value for the Dow Jones
Industrial Average. For the months from March to December, this is computed by dividing book value at
the end of the previous year by the price at the end of the current month. For the months of January and
February, this is computed by dividing book value at the end of two years ago by the price at the end of
the current month.
NTIS: Net Equity Expansion is the ratio of 12-month moving sums of net issues by NYSE listed stocks
divided by the total end-of-year market capitalization of NYSE stocks

TBL: 3-month Treasury-bill rates from economic research data base at the Federal Reserve Bank at St.
Louis (FRED).

LTY: Long Term Yields are from Ibbotson’s Stocks, Bonds, Bills and Inflation Yearbook

LTR: Long Term Government Bond Returns are from Ibbotson’s Stocks, Bonds, Bills and Inflation
Yearbook

DFY: Default Yield Spread is the difference between BAA and AAA-rated corporate bond yields

DFR: Default Return Spread is the difference between long-term corporate bond and long-term
government bond returns

INFL: Inflation is the Consumer Price Index (All Urban Consumers) from the Bureau of Labor Statistics

30
 Table 1 Panel A – Firm-level Summary Statistics
N MEAN STD P25 MEDIAN P75
VIXRSQ 31988 0.21 0.23 0.02 0.11 0.32
IT 23758 0.21 0.36 0.00 0.00 0.25
LOGSIZE 31988 14.37 1.55 13.29 14.28 15.34
MKTBETA 31988 1.09 0.51 0.73 1.02 1.37
MKTSYNC 31988 0.25 0.17 0.11 0.22 0.37
EARET 31971 0.00 0.08 -0.03 0.00 0.04
ESURP 23887 0.45 2.27 -0.15 0.11 0.73
AGG_EARET 31801 0.00 0.02 -0.01 0.00 0.01
AGG_VOLAT 31910 0.34 0.48 0.08 0.19 0.39
AGG_TURN 31910 9.66 3.27 7.43 9.24 11.24
FIRM_ROA 31988 0.00 0.04 0.00 0.01 0.02
FIRM_PROFIT_MGN 31988 0.00 0.39 0.01 0.06 0.13
FIRM_ASSET_TURN 31988 0.20 0.17 0.08 0.16 0.27
FIRM_LEV 31988 3.81 4.23 1.64 2.34 3.75
FIRM_ROE 31988 0.01 0.12 0.00 0.02 0.05

31
 Table 1 Panel B – Firm Level Correlations
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1 VIXRSQ 1.00 0.03 0.07 0.23 0.45 -0.04 -0.01 -0.10 0.44 0.35 -0.06 -0.06 -0.03 0.03 -0.06
2 IT 0.03 1.00 -0.24 -0.07 -0.12 -0.02 -0.05 -0.02 0.01 0.08 -0.18 -0.11 -0.08 0.08 -0.16
3 LOGSIZE 0.07 -0.19 1.00 -0.09 0.33 0.02 0.07 0.02 0.02 -0.08 0.23 0.21 -0.14 0.13 0.24
4 MKTBETA 0.23 -0.10 -0.10 1.00 0.42 -0.01 0.01 0.00 0.15 0.00 -0.11 -0.17 -0.01 0.00 -0.13
5 MKTSYNC 0.38 -0.12 0.34 0.49 1.00 0.00 0.05 -0.01 0.47 0.13 0.06 0.08 -0.14 0.13 0.07
6 EARET -0.03 -0.03 0.03 -0.01 0.00 1.00 0.14 0.24 -0.03 -0.10 0.12 0.12 0.04 -0.02 0.12
7 ESURP 0.00 -0.10 0.11 0.00 0.07 0.22 1.00 0.02 0.02 -0.01 0.09 0.05 0.05 0.00 0.06
8 AGG_EARET -0.05 -0.02 0.02 0.01 0.00 0.25 0.01 1.00 -0.11 -0.28 0.03 0.03 0.00 -0.01 0.03
9 AGG_VOLAT 0.28 -0.05 0.06 0.20 0.50 -0.01 0.04 0.01 1.00 0.53 -0.04 -0.03 -0.07 0.01 -0.05
10 AGG_TURN 0.20 0.09 -0.05 -0.06 0.04 -0.06 -0.02 -0.14 0.24 1.00 -0.11 -0.11 -0.01 0.02 -0.12
11 FIRM_ROA -0.03 -0.22 0.19 -0.07 0.02 0.12 0.27 0.02 -0.02 -0.06 1.00 0.79 0.17 -0.09 0.84
12 FIRM_PROFIT_MGN -0.05 -0.13 0.28 -0.11 0.12 0.10 0.21 0.01 0.03 -0.07 0.75 1.00 0.06 -0.01 0.71
13 FIRM_ASSET_TURN -0.01 -0.12 -0.16 0.02 -0.16 0.05 0.10 0.01 -0.09 0.00 0.37 -0.19 1.00 -0.24 0.11
14 FIRM_LEV 0.01 0.15 0.26 -0.12 0.16 -0.01 -0.02 0.00 0.02 0.02 -0.28 -0.05 -0.30 1.00 -0.11
15 FIRM_ROE -0.03 -0.18 0.28 -0.11 0.08 0.12 0.28 0.01 -0.04 -0.07 0.89 0.76 0.24 0.04 1.00

0
 Table 1 Panel C – Autocorrelation matrix of VIXRSQ
1 2 3 4 5
1 VIXRSQ 1.00 0.42 0.09 -0.08 -0.19
2 VIXRSQ - 1 lag 0.39 1.00 0.39 0.06 -0.10
3 VIXRSQ - 2 lags 0.11 0.35 1.00 0.35 0.00
4 VIXRSQ - 3 lags -0.05 0.06 0.32 1.00 0.31
5 VIXRSQ - 4 lags -0.17 -0.07 -0.01 0.28 1.00

Table 1 provides descriptive statistics for our sample of firms from 1996 to 2015. VIXRSQ is our
measure of macro-connectedness determined from the regression of the market implied volatility on the
firm’s implied volatility. IT is the ratio of insider purchases to insider sales for a firm-year. LOGSIZE is
the log of the firm’s end-of-year market value of equity. MKTBETA (MKTSYNC) is the coefficient (R-
squared) from a firm-year CAPM regression. AGG_EARET is the value-weighted market return over the
3-day earnings announcement window excluding firm i. AGG_VOLAT is the sum of the squared daily
market returns, excluding firm i, over the 3-day earnings announcement window divided by the volatility
of market returns, excluding firm i, over the 30 day period prior to the earnings announcement period
multiplied by 1000. AGG_TURN is the mean of aggregate volume (volume divided by shares
outstanding), excluding firm i, over the 3-day announcement window. FIRM_ROA is the ratio of
earnings excluding extraordinary items and discontinued operations to total assets announced by the firm
in the first quarter of the year. FIRM_ASSET_TURN is the ratio of sales to total assets announced by the
firm in the first quarter of the year. FIRM_PROFIT_MGN is the ratio of earnings excluding
extraordinary items and discontinued operations to sales announced by the firm in the first quarter of the
year. FIRM_LEV is the ratio of total assets to total equity as of the start of the first quarter of the year.
FIRM_ROA is the ratio of earnings excluding extraordinary items and discontinued operations to total
equity announced by the firm in the first quarter of the year. Correlations present Pearson above and
Spearman below the diagonal, and numbers in bold are significant at the 5% (2-sided) level.

0
 Table 2 Panel A – Aggregate Level Summary Statistics
N MEAN STD P25 MEDIAN P75
FUTAGGRET 20 0.10 0.19 -0.01 0.13 0.24
AGG_ROA 20 0.01 0.03 0.00 0.02 0.03
AGG_PROFIT_MGN 20 -0.02 0.08 -0.06 0.01 0.03
AGG_ASSET_TURN 20 0.76 0.07 0.72 0.75 0.78
AGG_LEV 20 5.06 0.37 4.82 5.01 5.31
AGG_ROE 20 0.00 0.08 -0.03 0.02 0.06
DP 20 -4.03 0.21 -4.12 -4.03 -3.90
DY 20 -4.02 0.21 -4.12 -4.02 -3.89
EP 20 -3.15 0.37 -3.32 -3.05 -2.91
SVAR 20 0.00 0.00 0.00 0.00 0.00
BM 20 0.27 0.07 0.21 0.27 0.32
NTIS 20 0.00 0.02 -0.01 0.01 0.02
TBL 20 0.02 0.02 0.00 0.01 0.05
LTY 20 0.05 0.01 0.04 0.05 0.06
LTR 20 0.01 0.01 0.00 0.01 0.01
DFY 20 0.01 0.00 0.01 0.01 0.01
DFR 20 -0.04 0.01 -0.05 -0.04 -0.03
INFL 20 0.00 0.00 0.00 0.00 0.00

0
 Table 2 Panel B – Aggregate Level Correlations
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
1 FUTAGGRET 1.00 0.19 0.36 0.20 -0.20 0.32 0.47 0.47 -0.03 0.26 0.28 -0.02 -0.26 -0.11 0.07 0.32 0.18 -0.30
2 AGG_ROA 0.03 1.00 0.95 0.26 -0.08 0.90 0.45 0.49 0.27 -0.44 0.51 0.14 -0.24 -0.17 -0.35 0.00 0.07 0.26
3 AGG_PROFIT_MGN 0.21 0.86 1.00 0.28 -0.16 0.92 0.43 0.47 0.27 -0.43 0.48 0.24 -0.29 -0.17 -0.32 -0.05 0.11 0.10
4 AGG_ASSET_TURN 0.11 0.32 0.33 1.00 -0.57 0.22 -0.25 -0.22 -0.02 -0.17 -0.51 0.53 0.68 0.82 -0.05 -0.42 -0.77 0.46
5 AGG_LEV -0.08 -0.12 -0.37 -0.52 1.00 -0.27 0.27 0.24 -0.39 0.44 0.17 -0.63 -0.45 -0.39 -0.06 0.71 0.36 -0.16
6 AGG_ROE 0.23 0.83 0.94 0.23 -0.26 1.00 0.30 0.34 0.29 -0.58 0.51 0.38 -0.30 -0.19 -0.39 -0.13 0.10 0.23
7 DP 0.40 0.21 0.18 -0.48 0.22 0.13 1.00 1.00 0.04 0.23 0.70 -0.52 -0.61 -0.55 -0.16 0.61 0.48 -0.28
8 DY 0.40 0.21 0.18 -0.48 0.24 0.14 1.00 1.00 0.05 0.18 0.70 -0.48 -0.60 -0.54 -0.20 0.57 0.46 -0.26
9 EP -0.09 0.47 0.56 -0.22 -0.19 0.46 0.38 0.38 1.00 -0.46 0.50 0.07 -0.05 -0.28 0.30 -0.53 0.29 0.00
10 SVAR 0.22 -0.53 -0.64 -0.09 0.28 -0.59 -0.08 -0.08 -0.57 1.00 -0.11 -0.56 -0.11 0.05 0.35 0.70 0.07 -0.36
11 BM 0.14 0.39 0.43 -0.60 0.14 0.46 0.65 0.64 0.74 -0.33 1.00 -0.30 -0.76 -0.82 0.05 0.31 0.78 -0.21
12 NTIS 0.14 -0.01 0.20 0.66 -0.57 0.16 -0.47 -0.46 -0.22 0.02 -0.38 1.00 0.29 0.47 -0.02 -0.67 -0.40 0.32
13 TBL -0.06 -0.05 -0.07 0.77 -0.42 -0.20 -0.52 -0.53 -0.36 0.08 -0.81 0.37 1.00 0.85 0.06 -0.52 -0.82 0.44
14 LTY -0.03 -0.11 -0.08 0.83 -0.45 -0.16 -0.60 -0.59 -0.48 0.18 -0.87 0.62 0.91 1.00 0.04 -0.38 -0.92 0.43
15 LTR 0.07 -0.30 -0.27 -0.10 0.01 -0.33 -0.22 -0.23 0.11 0.38 0.06 0.11 0.00 0.01 1.00 -0.13 0.29 -0.14
16 DFY 0.25 0.04 -0.14 -0.56 0.76 0.03 0.44 0.44 -0.05 0.35 0.42 -0.56 -0.54 -0.58 -0.12 1.00 0.36 -0.25
17 DFR 0.20 0.06 0.08 -0.80 0.44 0.16 0.58 0.57 0.45 -0.04 0.87 -0.48 -0.92 -0.94 0.21 0.60 1.00 -0.45
18 INFL -0.16 0.41 0.19 0.56 -0.21 0.19 -0.29 -0.30 0.02 -0.11 -0.32 0.12 0.48 0.43 -0.10 -0.22 -0.45 1.00

Table 2 provides descriptive statistics for aggregate-level variables 1996 to 2015. FUTAGGRET is the one-year ahead annual market return.
AGG_ROA is the sample-wide cross-sectional average of the annual return-on-assets ratio. The annual return-on-assets ratio is the sum of the
quarterly ratios of earnings excluding extraordinary items and discontinued operations to total assets over the four quarters of the year.
AGG_ASSET_TURN is the sample-wide cross-sectional average of the asset-turnover ratio. The annual asset-turnover ratio is the sum of the
quarterly ratios of sales to total assets over the four quarters of the year. AGG_PROFIT_MGN is the sample-wide cross-sectional average of the
annual profit margin ratio. The annual profit margin ratio is the mean of the quarterly ratios of earnings excluding extraordinary items and
discontinued operations to sales over the four quarters of the year. AGG_LEV is the sample-wide cross-sectional average of the annual leverage
ratio. The annual leverage ratio is the mean of the quarterly ratios of total assets to total equity over the four quarters of the year. AGG_ROE is
the sample-wide cross-sectional average of the annual return-on-equity ratio. The annual return-on-equity ratio is the sum of the quarterly ratios of
earnings excluding extraordinary items and discontinued operations to total shareholder equity over the four quarters of the year. The Appendix
defines all other variables. Aggregate level correlations are based on a sample of 20 observations. Correlations present Pearson above and
Spearman below the diagonal, and numbers in bold are significant at the 5% (2-sided) level.

1
 Table 3 – Return Regressions of Aggregate Stock Returns on VIXRSQ and Insider Purchases
(1) (2) (3)
IT 0.004 -0.012** 0.046
(0.88) (-2.56) (1.15)
VIXRSQ -0.109 -0.095
(-1.67) (-1.51)
IT*VIXRSQ 0.068** 0.072**
(2.33) (2.28)
LOGSIZE 0.010**
(2.30)
IT*LOGSIZE -0.003
(-1.28)
MKTBETA 0.032**
(2.27)
IT*MKTBETA -0.017
(-1.26)
MKTSYNC -0.234**
(-2.60)
IT*MKTSYNC 0.006
(0.16)
DP 2.150 1.673 1.279
(0.61) (0.48) (0.38)
DY -1.553 -1.078 -0.666
(-0.44) (-0.31) (-0.20)
EP 0.337 0.327 0.356
(1.49) (1.47) (1.70)
SVAR 32.185 35.469 43.560
(1.01) (1.11) (1.38)
BM -0.808 -0.808 -0.850
(-0.48) (-0.49) (-0.54)
NTIS 11.021** 10.924** 11.574**
(2.28) (2.29) (2.53)
TBL 6.158 6.034 5.915
(1.28) (1.26) (1.28)
LTY 6.900 6.465 5.667
(0.37) (0.36) (0.33)
LTR -12.012 -10.992 -10.973
(-0.78) (-0.74) (-0.78)
DFY 35.351 37.157 39.454
(0.83) (0.90) (1.01)
DFR 14.281 13.783 14.135
(0.81) (0.81) (0.88)
INFL -54.893 -50.220 -40.761
(-1.05) (-0.98) (-0.80)
Constant 3.575** 3.517** 3.546**
(2.19) (2.18) (2.27)
Observations 23,758 23,758 23,758
R-squared 0.510 0.518 0.538

Table 3 provides regression summary statistics for FUTAGGRET-i,t in Equations (3) and (4). Table 1,
Table 2, and the Appendix define all variables. T-stats are in parenthesis based on standard errors
clustered by year. *, **, *** indicates significance at 10%, 5%, and 1% based on two-sided alternatives.
The sample comprises firm-years from 1996 to 2015.

2
 Table 4 – Aggregated Analysis of Insider Trading Intensity, VIXRSQ and Firm Returns
(1) (2)
ADJFUTRET_ABN ADJFUTRET_ABN

AGGIT -0.31 -1.43

(0.45) (-1.64)
AGGVIXRSQ -0.16 -2.78**
(-0.56) (-2.46)
AGGIT_VIXRSQ 11.70**
(2.66)
Constant 0.082 0.36*
(-0.56) (1.75)

Observations 20 20
R-Squared 0.04 0.34

Table 4 provides regression summary statistics for ADJFUTRET_ABNi,t, the one-year ahead annual
value-weighted market return less the implied market risk premium and the 10-year treasury bond return.
AGGIT is the cross-sectional average of the ratio of insider purchases to insider purchases and sales over
the year. AGGVIXRSQ is the cross-sectional average of our measure of macro-connectedness
determined from the regression of the market implied volatility on the firm’s implied volatility.
AGGIT_VIXRSQ is the cross-sectional average of the product of our measure of macro-connectedness
and the ratio of insider purchases to insider purchases and sales over the year. T-stats are in parentheses.
*, **, *** indicates significance at 10%, 5%, and 1% based on two-sided alternatives. The sample
comprises years from 1996 to 2015.

3
 Table 5 – Alternate Controls for Macrouncertainty
(1) (2)
FUTAGGRET FUTAGGRET

IT 0.054* 0.007
(1.98) (0.30)
VIXRSQ -0.135*** -0.129***
(-3.42) (-3.43)
IT*VIXRSQ 0.056*** 0.036**
(2.89) (2.40)
LOGSIZE 0.009*** 0.009***
(3.57) (3.68)
IT*LOGSIZE -0.002 -0.001
(-1.28) (-0.85)
MKTBETA 0.030*** 0.030***
(3.25) (3.32)
IT*MKTBETA -0.022*** -0.019***
(-3.38) (-3.49)
MKTSYNC -0.154*** -0.153***
(-3.15) (-3.18)
IT*MKTSYNC -0.041** -0.043*
(-2.36) (-1.86)
YRVIX -11.084*** -11.131***
(-4.20) (-4.23)
YRVIX*IT 0.136
(1.02)
EQUITY_MKT_U -0.001 -0.001
(-0.81) (-0.81)
EQUITY_MKT_U*IT -0.000
(-0.48)
ABS_BW_SENT -0.087* -0.095*
(-1.80) (-1.78)
ABS_BW_SENT*IT 0.028
(1.13)
Observations 23,758 23,758
R-squared 0.798 0.799

Table 5 provides regression summary statistics for FUTAGGRET-i,t. YRVIX is the mean of the S&P500
implied volatility for the year. EQUITY_MKT_U is mean of a text-based measure of uncertainty
surrounding the equity markets for the year. ABS_BW_SENT is mean of the absolute value of sentiment
(Baker and Wurgler, 2006) for the year. All other variables are defined in Table 1, Table 2, and the
Appendix. All regressions include the untabulated equity risk premium controls listed in the Appendix.
T-stats are presented in parenthesis based on standard errors clustered by year. *, **, *** indicates
significance at 10%, 5%, and 1% based on two-sided alternatives. The sample comprises firm-years from
1996 to 2015.

4
 Table 6 – Insider Trading Intensity, VIXRSQ and Firm Returns
(1) (2) (3)
ADJFUTRET ADJFUTRET ADJFUTRET

IT 0.386** 0.397** -0.016

(2.57) (2.55) (-0.06)
VIXRSQ 0.022 0.024
(0.50) (0.57)
IT*VIXRSQ 0.085 0.071
(1.10) (0.91)
MEANFIRMIV -0.035
(-0.32)
IT*MEANFIRMIV 0.255**
(2.86)
LOGSIZE 0.004 0.003 0.001
(0.43) (0.38) (0.05)
IT*LOGSIZE -0.025** -0.027** -0.009
(-2.28) (-2.19) (-0.54)
BM 0.065*** 0.063*** 0.061***
(5.06) (4.71) (4.61)
ANNFIRMRET -0.035 -0.033 -0.032
(-0.96) (-0.92) (-0.88)
Constant -0.072 -0.069 -0.012
(-0.53) (-0.52) (-0.06)

Observations 23,757 23,757 23,757

R-squared 0.016 0.017 0.018

Table 6 provides regression summary statistics for ADJFUTRETi,t, the one year ahead annual firm return
less the value-weighted market return for the same period. BM is the equity book to market ratio.
ANNFIRMRET is the current year firm return. MEANFIRMIV is the annual average implied volatility
of the firm for the current year. All other variables are defined in Table 1, and the Appendix. All
regressions include the untabulated equity risk premium controls listed in the Appendix. T-stats are
presented in parenthesis based on standard errors clustered by year. *, **, *** indicates significance at
10%, 5%, and 1% based on two-sided alternatives. The sample comprises firm-years from 1996 to 2015.

5
 Table 7 – Analysis of Aggregate Stock Returns on VIXRSQ and Insider Purchases Using Alternate Measures
Panel A: Equal-Weighted Returns Panel B: Non-parametric Ranks by Tercile Panel C: Insider Trading via Intensity Panel D: Insider Trading via Trading Size
(1) (2) (3) (4) (5) (6) (7) (8)
FUTAGG- FUTAGG- FUTAGG- FUTAGG- FUTAGG- FUTAGG- FUTAGG- FUTAGG-
EWRET EWRET RET RET RET RET RET RET
IT -0.020*** 0.030 IT 0.002 0.001 IT_TXN -0.007*** 0.026 IT_BET -0.011* 0.027
(-2.90) (0.53) (-0.45) (0.15) (-3.02) (1.50) (-1.88) (0.65)
VIXRSQ -0.125 -0.104 VIXRSQ_R -0.003** -0.003** VIXRSQ -0.093 -0.078 VIXRSQ -0.116* -0.101
(-1.41) (-1.22) (-2.62) (-2.34) (-1.46) (-1.29) (-1.77) (-1.60)
IT*VIXRSQ 0.091** 0.100** IT*VIXRSQ_R 0.006** 0.007** IT_TXN*VIXRSQ 0.033** 0.034** IT_BET*VIXRSQ 0.084** 0.082*
(2.46) (2.43) (2.36) (2.10) (2.56) (2.39) (2.11) (2.08)
LOGSIZE 0.015** LOGSIZE_R 0.001 LOGSIZE 0.009** LOGSIZE 0.010**
(2.76) (-0.95) (2.30) (2.26)
IT*LOGSIZE 0.002 IT*LOGSIZE_R 0.002 IT_TXN*LOGSIZE -0.002 IT_BET*LOGSIZE -0.002
(-0.66) (0.76) (-1.71) (-0.73)
MKTBETA 0.047** MKTBETA_R 0.002 MKTBETA 0.027** MKTBETA 0.032**
(2.73) (0.99) (2.48) (2.19)
IT*MKTBETA -0.019 IT*MKTBETA_R -0.002 IT_TXN*MKTBETA -0.010 IT_BET*MKTBETA -0.015
(-1.11) (-0.58) (-1.35) (-1.07)
MKTSYNC -0.355*** MKTSYNC_R 0.001 MKTSYNC -0.229** MKTSYNC -0.234**
(-3.26) (1.35) (-2.63) (-2.57)
IT*MKTSYNC -0.014 IT*MKTSYNC_R -0.003* IT_TXN*MKTSYNC 0.014 IT_BET*MKTSYNC 0.014
(-0.27) (-2.09) (0.79) (0.34)
Observations 23,758 23,758 Observations 23,758 23,758 Observations 23,256 23,256 Observations 23,764 23,764
R-squared 0.60 0.62 R-squared 0.51 0.51 R-squared 0.52 0.54 R-squared 0.52 0.54

Table 7 provides regression results of equations (3) and (4) using alternate measures of IT, VIXRSQ, and AGGFUTRET. FUTAGGEWRET is the one
year ahead equal-weighted market return. VIXRSQ_R, LOGSIZE_RANK, MKTBETA_R and MKTSYNC_R are the annual tercile ranks of VIXRSQ,
LOGSIZE, MKTBETA, MKTSYNC. IT_TXN is the ratio of insider purchase transactions to all insider transactions in firm-year. IT_BET is the share-
weighted percentage of shares traded by an insider in a firm-year. All other variables are defined in Table 1, Table 2, and the Appendix. All regressions
include the untabulated equity risk premium controls listed in the Appendix. T-stats are presented in parenthesis based on standard errors clustered by
year. *, **, *** indicates significance at 10%, 5%, and 1% based on two-sided alternatives. The sample comprises firm-years from 1996 to 2015.

6
 Table 8 - Analysis of Earnings Announcement Period Firm and Aggregate Information
Panel A: DV = AGG_EARET Panel B: DV = AGG_VOLAT Panel C: DV = AGG_TURN
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
EA_NEWS = EARET ESURP EARET ESURP ABS_EARET ABS_ESURP ABS_EARET ABS_ESURP ABS_EARET ABS_ESURP ABS_EARET ABS_ESURP

EA_NEWS 0.036*** 0.000 -0.005 0.001 0.249** 0.000 2.857** 0.029 2.018*** 0.148*** 33.843*** 0.062
(11.44) (0.22) (-0.27) (1.25) (2.19) (0.05) (2.63) (1.31) (3.47) (8.60) (6.35) (0.48)
VIXRSQ -0.006* -0.007** -0.006** -0.008** 0.463*** 0.777*** 0.491*** 0.746*** 4.977*** 6.339*** 3.279*** 4.437***
(-1.88) (-1.99) (-2.33) (-2.37) (4.28) (5.57) (4.88) (6.13) (11.00) (12.13) (7.97) (10.03)
VIXRSQ* EA_NEWS 0.061*** 0.001* 0.027** 0.001 4.897*** 0.037*** 3.271*** 0.029** 19.154*** 0.066 12.097*** 0.176***
(4.70) (1.72) (2.33) (1.59) (5.48) (3.12) (4.04) (2.32) (6.34) (1.36) (4.39) (3.21)
LOGSIZE 0.001*** 0.001** -0.072*** -0.102*** 0.371*** 0.061
(3.00) (2.47) (-5.09) (-5.51) (4.84) (0.61)
LOGSIZE* EA_NEWS 0.004** -0.000 -0.170** -0.002 -2.009*** 0.005
(2.48) (-1.21) (-2.17) (-1.25) (-5.15) (0.59)
MKTBETA 0.001 0.001 -0.122*** -0.188*** -0.830*** -1.267***
(0.91) (0.90) (-4.60) (-6.06) (-6.65) (-9.52)
MKTBETA* EA_NEWS -0.026*** -0.000 -0.933*** 0.004 -7.538*** 0.023
(-7.41) (-1.00) (-5.25) (0.95) (-9.64) (1.02)
MKTSYNC 0.002 0.003 0.014 0.177* 6.563*** 7.794***
(0.74) (0.75) (0.15) (1.66) (12.58) (12.89)
MKTSYNC* EA_NEWS 0.129*** 0.000 5.535*** 0.003 37.168*** -0.255***
(6.76) (0.56) (5.75) (0.23) (8.89) (-3.23)

Observations 31,784 23,765 31,784 23,765 31,893 23,838 31,893 23,838 31,893 23,838 31,893 23,838
R-squared 0.202 0.158 0.214 0.162 0.279 0.259 0.307 0.286 0.476 0.495 0.560 0.551

Table 8, Panels A, B and C provide regression summary statistics for AGG_EARET (columns 1-4), AGG_VOLAT (columns 5-8), and
AGG_TURN (columns 9-12). EARET is the firm’s returns over the 3-day earnings announcement window. ESURP is the actual earnings minus
the mean analyst estimate of earnings for the fourth quarter earnings announcement, scaled by analyst dispersion prior to the earnings
announcement. ABS_EARET and ABS_ESURP are the absolute value of EARET and ESURP. Table 1 defines other variables. All regressions
include untabulated firm fixed-effects. T-stats are in parentheses based on standard errors clustered by earnings-announcement date. *, **, ***
indicates significance at 10%, 5%, and 1% based on two-sided alternatives. The sample comprises firm-years from 1996 to 2015.

7
 Table 9 – Regressions of Aggregate Intrinsic Value Factors on Firm-Level Intrinsic Value
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
AGG_SIGNAL (DV) ∆AGG_ ∆AGG_ ∆AGG_ ∆AGG_ ∆AGG_ ∆AGG_ ∆AGG_ ∆AGG_ ∆AGG_ ∆AGG_
ROA PROFIT_ ASSET_ LEV ROE ROA PROFIT_ ASSET_ LEV ROE
MGN TURN MGN TURN
FIRM_SIGNAL ∆FIRM_ ∆FIRM_ ∆FIRM_ ∆FIRM_ ∆FIRM_ ∆FIRM_ ∆FIRM_ ∆FIRM_ ∆FIRM_ ∆FIRM_
ROA PROFIT_ ASSET_TU LEV ROE ROA PROFIT_ ASSET_ LEV ROE
MGN RN MGN TURN

VIXRSQ 0.004 -0.007 0.003 0.368 0.033 0.001 -0.017 -0.001 0.438 0.015
(0.16) (-0.11) (0.12) (1.15) (0.49) (0.04) (-0.28) (-0.03) (1.45) (0.24)
SIGNAL 0.000 -0.001 0.015 0.004 0.010 0.141** 0.049*** -0.072 -0.005 0.120
(0.00) (-0.17) (1.32) (0.96) (0.74) (2.21) (2.86) (-1.57) (-0.23) (1.71)
VIXRSQ*FIRM_SIGNAL 0.256*** 0.073*** 0.063** 0.052** 0.180** 0.167** 0.053*** 0.030 0.035 0.125
(3.86) (5.03) (2.15) (2.11) (2.22) (2.70) (3.26) (1.49) (1.59) (1.64)
SIZE 0.001 0.002 0.001 -0.028 0.000
(0.60) (0.57) (0.52) (-1.47) (0.04)
SIZE*SIGNAL -0.012** -0.004*** 0.005 -0.000 -0.010**
(-2.77) (-3.35) (1.55) (-0.06) (-2.18)
MKTBETA 0.003 0.008 0.002 -0.088 0.006
(0.91) (0.88) (0.42) (-1.63) (0.75)
MKTBETA*FIRM_SIGNAL -0.019 -0.005 0.002 0.002 -0.001
(-1.29) (-0.97) (0.16) (0.41) (-0.13)
MKTSYNC 0.004 0.013 0.007 -0.031 0.047
(0.23) (0.26) (0.46) (-0.14) (0.92)
MKTSYNC*FIRM_SIGNAL 0.290** 0.075** 0.085 0.037 0.168*
(2.61) (2.30) (1.00) (1.34) (2.01)
Constant -0.008* -0.020 -0.014*** 0.099 -0.051*** -0.021 -0.060 -0.027 0.586** -0.068*
(-1.85) (-1.53) (-3.01) (1.10) (-4.12) (-1.37) (-1.24) (-1.41) (2.37) (-1.77)
Observations 31,988 31,988 31,988 31,988 31,988 31,988 31,988 31,988 31,988 31,988
R-squared 0.037 0.031 0.007 0.079 0.040 0.052 0.045 0.018 0.058 0.063

Table 9, provides regression summary statistics for ∆AGG_ROA (columns 1, 6), ∆AGG_PROFIT_MGN (columns 2, 7), ∆AGG_ASSET_TURN
(columns 3, 8), ∆AGG_LEV (columns 4, 9), and ∆AGG_ROE (columns 5, 10). Table 1 and 2 define all variables. T-stats are in parentheses
based on standard errors clustered by year. *, **, *** indicates significance at 10%, 5%, and 1% based on two-sided alternatives. The sample
comprises firm-years from 1996 to 2015.

8
 Figure 1 - Measurement

Figure 1 depicts the timing of measurement of key variables. All variables are defined in Table 1 and
Table 2. X refers to ROA, PROFIT_MGN, ASSET_TURN, LEV, and ROE.

Figure 2 – VIXRSQ of Dow 30 as of December 31, 2015

Figure 2 depicts the level of measure of macro-connectedness determined from the regression of the
market implied volatility on the firm’s implied volatility for the Dow 30 as of December 31, 2015.

9
 Figure 3 – Year-by-Year Aggregated Analyses of Insider Trading Intensity, VIXRSQ and Firm Returns

40.0%

30.0%

20.0%

10.0%

0.0%
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
-10.0%

-20.0%

-30.0%

-40.0%

-50.0%

-60.0% Fitted (AGGIT, AGGVIXRSQ, AGGIT*AGGVIXRSQ) Actual (ADJFUTRET_ABN)

Fitted Main Only (AGGIT, AGGVIXRSQ)

Figure 3 represents graphical results of year by year aggregate analyses from Table 4. The dotted line
represents the fitted value using only the AGGIT and AGGVIXRSQ to estimate the dependent variable,
ADJFUTRET_ABN. The dashed line represents the fitted value using AGGIT, AGGVIXRSQ and
AGGIT_AGGVIXRSQ.

10