Insiders' timing ability and disclosure on corporate share buyback trading

Abstract

PurposeDue to insufficient disclosure on open market share repurchases in the USA, at any given point in time, outside shareholders have no knowledge of whether their firm is executing open market share repurchase trades. It is hypothesized that such information disparity between outside shareholders and insiders of a repurchasing firm creates asymmetric opportunities for insiders to time their sell trades in a period when the firm is engaged in buyback trading of its own shares. Insiders have an incentive to sell when the firm is in the market supporting the price by repurchasing its shares. The purpose of this study is to examine this hypothesis (insider timing hypothesis) by investigating insiders' trading activities during the periods of corporate share buyback trading.Design/methodology/approachMultiple regression analyses are used to explore relations among trades by insiders, corporate share buyback trades, and a number of other control variables.FindingsThis study finds evidence that insiders do increase the net number of shares sold in a fiscal quarter when the firm is in the market engaged in share buyback trading.Originality/valueThis study suggests the possibility of insiders' opportunistic trading behavior during the periods of corporate open market share buyback trading.