The level of insider selling at Los Angeles public companies has been considerably lower than the national level over the past three months, suggesting that executives and directors of L.A. public companies are less concerned about an imminent market downturn than are their national counterparts.

A study of insider trading activity at 300 locally based public companies during the three-month period ended May 20 showed a sell/buy ratio of 2-to-1, meaning twice as many L.A. insiders sold shares in their companies during the period than bought shares.

While that may seem to be a bearish indicator, it is actually equivalent to the historic norm for all U.S. public companies, and is downright bullish compared with the 2.47-to-1 sell/buy ratio for all U.S. public companies in 1997, according to CDA/Investnet, a Fort Lauderdale, Fla.-based research firm that conducted the study for the Business Journal.

CDA/Investnet President Bob Gabele attributed the relative bullishness among L.A. insiders to the area’s high concentration of small public companies and to the fact that the region’s economic recovery started later than the recoveries of most other parts of the country.

“The smaller companies could be more affected by the local economy,” Gabele said. “The larger companies are more national in scope, so their stocks recovered sooner.”

Since insiders tend to sell when the share price is at lofty heights, and large company stocks are more likely to be at those levels today, insiders at big companies are more likely to be sellers, Gabele reasoned. And since L.A. has fewer large public companies than in years past, it also has fewer insiders who are selling.

Another possible explanation for L.A. insiders’ relative bullishness, said Harold Harrigian, a partner at Los Angeles-based Crowell Weedon & Co., is that small-company insiders have a different attitude than big-company insiders.

“At smaller companies, the people who hold the stock are usually founders. They tend to act like owners rather than investors,” he said.

One example of how small-company insiders may think more like long-term owners than investors looking for a quick windfall is Charles Adams, the 70-year-old chairman of Chad Therapeutics.

Adams took advantage of his company’s relatively depressed share price to buy 19,200 shares on the open market at between $6.63 and $7.02 during the three-month period, and exercised options for an additional 50,000 shares at $6.75 a share. As of its May 21 closing, Chad’s stock has slumped further, to $5.88 a share.

“That usually says the insider is optimistic about the outlook for his company,” said Charles Biderman, president of Trim Tabs Financial Services, a Santa Rosa company that tracks stock market liquidity.

That explanation seems to be supported by CDA/Investnet’s finding that the sell/buy ratio for L.A.’s 43 largest public companies was 3.7-to-1 for the three months ended May 20.

That is nearly twice the level for L.A. public companies overall, and well into the bearish range of the spectrum.

Any sell/buy ratio over 2.2-to-1 is in bearish territory, while 1.8-to-1 and lower is bullish, Gabele said.

“(L.A.’s large-company number) is well over the average and would have to be taken as a negative signal,” he said.

Indeed, the climbing level of insider selling nationwide, especially at large companies, has sparked concern in recent months that the stock market’s record bull run may finally be running out of gas.

“Executives probably think the fundamentals of their companies are good, but have never seen valuations this high before. So they are taking the opportunity to generate a level of liquidity,” said Harrigian. “If I see a lot of insider selling it gives me pause. You always feel better if the management keeps their ownership.”

But others attributed the insider sell-offs at large public companies to the massive amount of stock options being granted to top executives. Historically, between one-fifth and one-seventh of all outstanding stock options are exercised and sold each year.

“A lot of big companies tend to exhibit a higher rate of selling,” said David Coleman, investment manager at Watershed Investments in Washington, which bases its investment decisions on insider trading patterns. “Large companies have relatively rich compensation in terms of options. Executives look at options as part of their compensation.”

One L.A. insider who fits that description is Jill Barad, chairwoman of El Segundo-based toy giant Mattel Inc., who exercised options and then sold 224,453 shares in February. The options were exercised at between $11.58 and $14.02 and were sold at $41.57 and $42.16, which brought Barad a profit of around $6.4 million. It may well have been a smart move. Mattel’s stock has been trading in a volatile range since Barad took profits, closing May 21 at $39.06 a share.

Even after the sell-off, however, Barad still controls more than 700,000 shares in her company, according to CDA/Investnet, indicating she may still believe Mattel has upside potential.

So just how accurate is insider trading activity as an indicator of future stock market performance?

Biderman said it’s only one part of the puzzle. “Insider selling has been stronger (nationwide), but by itself it does not mean the stock market is going to go down. To think so would be to judge an elephant by shaking its trunk,” Biderman said.