What Do Insiders Know? Evidence from Insider Trading Around Share Repurchases and SEOs

Abstract

We examine complementarities in information contained in insider trades prior to open market share repurchase and seasoned equity offering announcements on one hand and information contained in announcements of these events on the other hand, using a comprehensive sample of over 4,300 repurchase and nearly 1,800 SEO announcements. Our first intuitive result is that insiders’ net buying increases before repurchases and decreases before SEOs. Second, we examine whether insider trades prior to SEOs and share repurchases contain more information about event firm valuation and future performance than insider trades during other times. We find that pre-event insider trading is a strong predictor of event announcement returns. Further, the long-term drift following repurchase announcements is strongly positively related to the extent of net buying activity by insiders in the six months before the repurchase announcement. Third, we examine the nature of information contained in pre-event insider trading and find that higher insider net purchasing before both types of events predicts better post-event operating performance. In addition, in the case of repurchases, more insider buying is associated with a larger reduction in post-event cost of capital. These results do not seem to be driven by investor sentiment. Taken together, our results suggest that there is complementarity between information in event announcements and that in pre-event insider trading and that insider trades seem to be especially informative prior to important corporate events.