Board Member Private Information and Insider Trading Around CEO Turnovers

Abstract

Theories of corporate boards assume that board members of a firm generate private information about the quality and performance of its CEO in the process of monitoring and advising him, and may use this information to decide whether or not to fire him. In this paper, I make use of data on insider trading around CEO turnovers to analyze, for the first time in the literature, whether board members indeed possess private information about CEO quality and the firm's prospects subsequent to a CEO turnover. I document the trading pattern of three types of firm insiders: board members, top corporate officers (excluding board members and the CEO), and the CEO himself. I then study whether trading by insiders (board members and top corporate officers) has predictive power for the nature of CEO turnovers (forced versus voluntary versus no turnover); the announcement effect of a CEO turnover; and the long-run post-turnover stock return performance of the firm. I find that trading by board members has predictive power for the nature of CEO turnovers: the larger the net selling from board members, the higher the probability of a forced turnover. Further, trading by members of more independent boards, larger boards, and boards with less entrenched CEOs has greater predictive power. Trading by board members also has predicative power for the announcement effects of a forced CEO turnover: a larger amount of selling by board members is associated with a more favorable announcement effect. Trading by board members immediately after a forced CEO turnover also has significant predictive power for subsequent long-run stock returns: the larger the net buying by board members, the better the subsequent long-run stock returns. Overall, my results are broadly consistent with the notion that board members possess private information about the firm and its CEO around the time of a CEO turnover.