Insider Trading of Managers: Information Environments and Executive Role Groups

Abstract

I examine the information asymmetry that exists between managers and shareholders. However, managers are not one homogeneous group. Information asymmetry may exist amongst managers as well. I test this hypothesis using the trades of different Executive Role Groups. I find that all managers do not trade the same, suggesting they experience a different information environment within the firm. By splitting executives into three groups, which parallels their relative positions in firm hierarchies, I document differences in purchase and sales behavior, controlling for ownership levels, firm and managerial attributes. By forming portfolios based on insider trades, these differences are born out in subsequent excess returns. Information asymmetry is likely to vary across firms in differently regulated environments or vary across time as new laws are implemented to increase disclosure. I find that reduced information asymmetry in more heavily regulated firms results in lower insider trading returns for managers as a whole. However, insiders are unequally affected by this information asymmetry with the senior and junior executives benefiting from information asymmetry while the middle role group (of predominantly financial experts) not apparently exploiting the information asymmetry.