Insider Purchases Research Articles

Does stronger corporate governance constrain insider trading? Asymmetric evidence from Australia

AbstractWe investigate the role of internal corporate governance in limiting opportunities for ASX company ‘insiders’ to extract abnormal returns from trading ‘own shares’. We show that stronger governance translates into more restrictive insider trading policies and, while not resulting in lower insider purchase volumes, values or profits, it does reduce insider selling profitability. Firm size and increasing trading policy restrictiveness is associated with reduced insider purchase profitability while insider sale profitability is reduced by aggregate governance, trading restrictions and increasing trading policy restrictiveness. We conclude that internal firm governance constrains insider sales but not purchases, providing contrarian trading signals.

Corporate Tax Aggressiveness and Insider Trading

ABSTRACTWe examine the association between corporate tax aggressiveness and the profitability of insider trading under the assumption that insider trading profits reflect managerial opportunism. We document that insider purchase profitability, but not sales profitability, is significantly higher on average in more tax aggressive firms. We also find that the positive association between tax aggressiveness and insider purchase profitability is attenuated for firms with more effective monitoring and is accentuated for firms with a more opaque information environment. In addition, we provide empirical evidence that tax aggressiveness is significantly associated with greater insider sales volume in the fiscal year prior to a stock price crash. Finally, we find that the association between tax aggressiveness and insider purchase profitability weakens after the introduction of FIN 48, consistent with the increased transparency of tax positions under the new disclosure requirement reducing insiders' information advantage and hence their ability to profit from insider trading. To the extent that insider trading profits reflect managerial opportunism, our results are consistent with managers exploiting the opacity arising from tax aggressive activities to extract rent from shareholders, particularly those shareholders who sold their shares to the managers. Our findings are particularly important in light of the number of studies relying on the agency view of tax avoidance to develop arguments or to draw inferences.

Corporate Governance and Insider Trading: Evidence from Malaysia

The collapse of prominent companies coupled with the increasing number of lawsuits against the directors of the companies for wrongdoing has raised concerns with insider trading activities. Insider trading does cause significant market reaction, whereby the insiders are able to earn significant cumulative abnormal returns for both purchases and sales. However, studies on the factors influencing insider trading are relatively scarce. This study aims to examine the factors that influence insider trading activities. Specifically, this study examines the relationship between four corporate governance factors, namely, board independence, board size, executive compensation and ownership concentration and insider trading activities in public listed companies in Malaysia. This study evinces that board size and executive compensation significantly influence insider purchases. On the other hand, significant market reaction caused by insider sales may be explained by other factors. Therefore, future studies could be carried out on other factors that may influence opportunistic insider sales. This study also found evidence against the semistrong form Efficient Market Hypothesis theory that suggests insiders cannot earn abnormal returns in a semi-strong efficient market using public information

Optimistic Disclosure Tone and Conservative Debt Policy

We examine the relationship between managerial optimism and debt conservatism (i.e., the low‐leverage puzzle). Our analysis demonstrates that optimistic tone, our time‐varying optimism measure, significantly decreases leverage. This evidence supports the proposition that optimistic managers who consider external financing as unduly costly use debt conservatively. This reduced reliance on external financing can be explained by further evidence that optimistic tone significantly increases cash holdings and decreases dividend payment. The negative tone–leverage relation is stronger in the presence of high insider purchase of own stocks, which confirms that optimistic tone reflects managerial optimism. This study suggests that managerial optimism can help explain the low‐leverage puzzle.

Abnormal returns on Canadian insider purchases before press releases

PurposeThis study aims to examine whether insider purchases made within 30 days prior to the publication of various kinds of press releases earn higher abnormal returns (AR) than those in the absence of such announcements. It also attempts to identify the factors that explain ARs.Design/methodology/approachThis study considers data for Canadian insider purchases made on the Toronto Stock Exchange 60 Index. An event study methodology is used to calculate AR, and a mixed regression model is used to evaluate the effect of corporate news on AR.FindingsThe empirical results indicate that insiders achieve greater ARs when they purchase stock prior to press releases; findings also show that these returns are specifically related to purchases made before the announcements of mergers and acquisitions, ongoing projects, financial structure, financial results and asset disposals. This is because of the firm effect.Practical implicationsThese findings have important implications for Canadian market regulatory authorities, especially the Ontario Securities Commission and other market participants who are interested in corporate governance, such as boards of directors and shareholders.Originality/valueThe present findings show that regulatory bodies must work with companies to raise awareness of improper insider trading.

Bank bailouts and corporate insider trading during the financial crisis of 2007–2009

Abstract Jagolinzer et al. (The information content of insider trades around government intervention during the financial crisis. Working paper, 2014) examine insider trading at banks that were bailed out by the U.S. taxpayers. They provide evidence that insiders of bailed-out banks profitably purchased their banks’ shares over a 9 month period after the Troubled Assets Relief Program (TARP) was announced in October 2008. They find that the purchases were profitable for up to 12 months after the purchases. However, Liu et al. (J Bank Finance 37:5048–5061, 2013) find that shareholder gains at the bailed out banks occurred only after the banks paid back the TARP funds, which in most cases occurred after 2010. In this paper we extend Jagolinzer et al.’s (2014) analysis to financial institutions that did not receive TARP funding as well as to non-financial firms. We find that insiders of the non-TARP financial and the non-financial firms traded their shares profitably after the TARP program was announced. Insider share purchases at these firms were highly profitable for up to 12 months after the purchases. However, insider purchases at the bailed-out banks were slightly profitable only for a month after the purchases, after which the shares that were bought declined in value. Our results for the TARP banks do not corroborate Jagolinzer et al.’s (2014) results, but are consistent with the evidence in Liu et al. (2013) and several other papers that examine the wealth effects of TARP program announcements and fund repayments.

Shareholder Litigation and Insider Trading: Evidence from Derivative Lawsuits

We examine whether shareholder litigation deters informed insider trading, utilizing the staggered adoptions of Universal Demand (UD) laws by different states. The UD laws substantially raise the hurdle for shareholders to file derivative litigation. We find that corporate insiders significantly increase opportunistic trades, including both insider purchases and sales, after the passage of UD laws, suggesting derivative litigation serves a disciplinary role in curbing insider trading. The deterrence effect of derivative litigation complements that of federal securities litigation, as it is useful in reducing informed insider trading activity unaccompanied by investor losses such as insider purchases. The deterrence effect on insider trading is more pronounced for firms with limited media coverage and high information asymmetry, and for corporate insiders facing less risk of other enforcement actions. Overall, our evidence suggests that shareholder litigation in the form of derivative litigation plays a unique role in curbing informed insider trading.

The informativeness of short sellers: an insider’s perspective

PurposeThe purpose of this paper is to empirically examine whether corporate insiders extract information from activity of outsiders, specifically the short sellers.Design/methodology/approachUsing portfolio approach and Fama-MacBeth regressions, this study examines the relation between short interest and subsequent insider trading activities.FindingsThe following results are reported. First, there is a strong inverse relation between short selling and subsequent insider trading, which is partially due to common private information and same target firm characteristics. Second, insiders extract information from shorts. This information extraction effect is more pronounced for firms whose insiders have stronger incentives to extract shorts information (insider purchases, higher short sale constraints, and better information environments). Third, during the September 2008 shorting ban, the information extraction affect disappeared among the large banned firms, whose shorting activities were distorted.Research limitations/implicationsThe findings contradict the of-cited accusations corporate executives hold against short sellers. Instead, corporate insiders appear to trade in the same direction as suggested by shorting activities.Practical implicationsAmong the vocal critics of short sellers are corporate insiders, who allege that short sellers beat down their stock prices. Many corporations even engage in stock repurchases to show confidence that the stock will perform well going forward despite the short sellers’ actions. This paper’s analysis on their personal portfolios suggests the other way around.Originality/valueBy focusing on how corporate insider trading is related to shorts information, this paper sheds new light on whether corporate decisions convey the true information the corporate insiders possess.

Do Implied Volatility Comovements Measure Macro-Connectedness?

Prior literature exploits option implied volatility to extract information about expectations of future information arrival intensity. We explore relations across implied volatilities, in contrast to the prior literature’s focus on implied volatilities of individual firms or indices. We investigate implied volatility comovement, IVC, the comovement between a firm’s implied volatility and the implied volatility of the market index. We hypothesize that IVC reflects the extent to which firm managers’ private information is informative about future aggregate equity returns. Using insider purchase intensity as a proxy for firms’ private information, we find that the association between insider purchases and future unexpected market returns significantly increases with IVC. Further, firms with higher IVC have stock returns that are more informative about future aggregate earnings and have stronger aggregate market reactions to their earnings announcements. This suggests that a firm’s implied volatility embeds important information about the nature of private information generated inside the firm.

Corporate Tax Aggressiveness and Managerial Rent Extraction: Evidence from Insider Trading

Recent studies argue that aggressive forms of tax avoidance can be used to facilitate managerial rent extraction from shareholders (e.g., Desai 2004; Desai and Dharmapala 2006; Desai et al. 2007). Despite this agency view of tax avoidance receiving increasing attention in the literature, there is limited empirical evidence that managers actually extract rents generated from tax avoidance activities. In this paper, we examine the association between corporate tax aggressiveness and managerial rent extraction in the form of insider trading profitability. We document that, on average, insider purchase profitability, but not sale profitability, is significantly higher in more tax aggressive firms. The positive association between tax aggressiveness and insider purchase profitability is attenuated for firms with more effective monitoring and for firms with better information environments. Finally, we find that tax aggressiveness is significantly associated with greater insider sale volume in the fiscal year prior to a stock price crash. Our study contributes to the literature by providing empirical evidence that managers do, in fact, extract insider trading rents through corporate tax aggressiveness (Armstrong et al. 2015) and the findings are particularly important in light of the number of studies relying on the agency view of tax avoidance to develop arguments or to draw inferences.

Do Brokers of Insiders Tip Other Clients?

We examine trading activity around insider transactions on the Toronto Stock Exchange and find evidence that some traders mimic insider positions. Our unique data set allows us to establish a direct connection between insiders, their brokerages, and the brokerages’ other clients. The findings are consistent with the possibility that some brokerages tip their clients about insider trades. Insiders in our sample have good timing; returns are usually positive (negative) after insider purchases (sales). Insiders’ good timing translates to the mimicking transactions, which appear to be profitable net of trading costs. Evidence consistent with tipping is observed mainly for smaller independent brokerages. This paper was accepted by Brad Barber, finance.

Do Proprietary Costs Deter Insider Trading?

Insider trading conveys insiders’ private information to outsiders. This private information potentially benefits rival firms, which may reduce the competitive advantage of the insiders’ firms. Using multiple approaches to identify proprietary information risk, we find proprietary costs are negatively associated with insiders’ purchases, especially when insider trades are more likely to be informative to rivals. Consistent with proprietary information risk increasing the costs of insider purchases and, hence, the required benefits to trade, insiders earn significantly higher abnormal profits when proprietary costs are higher. Exploiting settings with exogenous and event-driven variation in proprietary costs, we find insiders significantly reduce their purchases when noncompete agreement enforceability is high and before new product launches. Finally, firms with higher proprietary costs are more likely to impose trading window-based insider trading restrictions. Our findings indicate insiders and firms are aware of potential proprietary costs when insiders trade on private information, and they respond accordingly.

Corporate governance and the profitability of insider trading

This paper examines the influence of corporate governance systems on insiders' ability to profit from their information advantage and the ways through which corporate governance systems influence such ability. We find that corporate governance significantly reduces the profitability of insider sales but not that of insider purchases. Given that sales involve greater legal risk than purchases, the results suggest that well-governed firms restrict informed insider trading mainly to reduce legal risk. We also find that better-governed firms reduce the profitability of insider sales by increasing the likelihood of adopting ex-ante preventive measures (e.g., voluntary insider trading restriction policies), implementing such measures more effectively, and taking ex-post disciplinary actions more actively. These results highlight how better-governed firms are able to restrict insiders from exploiting private information.

Relative idiosyncratic volatility and the timing of corporate insider trading

This paper investigates whether corporate insiders trade when asymmetric information is high, using data on U.S. corporate insider transactions between 1986 and 2012. We generalize the literature focusing on insider trading around the announcement of different categories of corporate events. The key innovation of this paper is our asymmetric information proxy relivol, which measures deviations of idiosyncratic volatility from a firm's normal level. Our findings suggest that relivol positively predicts insider purchases, indicating that insiders buy shares when their informational advantage is high. However, insiders appear to sell less when relivol is high, which is consistent with existing evidence on sales being driven by alternative, non-information-related trading motives such as liquidity or diversification needs. Furthermore, we find that profits are significantly higher when insiders buy during periods of high relivol but not when they sell shares.

Corporate Governance, Earning Quality and Information Asymmetry: Evidence from Insider Trading Around the Globe

We investigate the performance and its link with information asymmetry, corporate governance and legal enforcement of insider transactions in 36 countries covering 10 Asian countries, 20 European countries and 6 countries in the rest. The results show that abnormal returns after insider trading are generally positive over time especially on Monday (insider sales) and Friday (insider purchase) for both executive and non-executive directors. The insider trading performance is typically related to earnings management which is measured by accruals. Corporate insider trading is informative and can assist in the analysis of future prospect of the firm. The zero-investment portfolios based on insider trading and accruals offers positive returns in most of the countries. However, after adjusting market risk, the profit of insider trading portfolios remain only in a few countries. The regression analysis exhibit the importance of corporate governance to limit the insider profits.

Insider Stock Trading and the Bond Market

Very little is known about how bond market participants react to insider stock trades. Our study attempts to fill this gap in the literature by analyzing the bond market reactions around insider transactions in U.S. firms during the period from 2002 to 2009. Our dataset covers 993 stock purchases and 6,562 stock sales by corporate insiders. We employ event study methodology to determine the cumulative abnormal bond price returns in a number of predetermined subperiods around the publication date and find that insider purchases negatively influence corporate bond prices, whereas insider sales appear to convey a positive signal to the bond market. The results for purchases are most obvious for financial firms and for investment-grade firms. The results for sales are larger in the subsamples including non-financial firms and non-investment-grade firms. For both purchases and sales, the effect is largest when the transactions are executed by insiders who are both corporate executive officers and chairmen or during the crisis period. The results of our regression analysis support the findings from the event study and reveal that purchases related to benefit plans transmit a less negative signal to the market than other purchases.

Institutional Investors and Insider Trading Profitability

This study examines the relationship between institutional ownership and the profitability of insider trading. A priori the relationship is not clear. On the one hand, institutions possess superior information that erodes insider advantages and are also active in monitoring. On the other hand, institutions could treat insider trading as an incentivizing mechanism to induce manager effort, leading to improved aggregate shareholder welfare. The results indicate that, on average, institutional ownership is negatively related to the profitability of insider trading, and this relationship derives from both direct monitoring and trading/pricing. Further analysis indicates that this relationship is concentrated for insider sales. In contrast, the findings reveal a positive relationship between institutions and the profitability of insider purchases, indicating an incentivizing role.

Insider Trading, Earnings Management and Information Asymmetry

Insider trading is highly tied to earnings management in an asymmetric information environment. Using US data during 2004-2012 and different discretionary accrual measures, we reveal that insiders net purchase ratio dominated by sales, insider purchase ratio and cumulative abnormal return are positively associated with absolute value of earnings management (earnings quality). We also document high earnings management practice in growth firms (low book-to market) than value firms (high book-to market) as well as active involvement of major insiders (e.g. CEO) in such practice for personal benefits. A leading role of information asymmetry and its moderation effect is prevalent. Further evidence also suggests manipulation of earnings for insiders’ opportunistic trading over routine trading. Overseeing the earnings management and insider trading behavior simultaneously by the regulators is identified as an important policy issue in this research.

Insiders’ incentives of using a specific disclosure tone when trading

This study investigates the relations between disclosure tone, insider trading and returns. Using a dictionary-based approach to quantify the disclosure tone contained in the Management Discussion and Analysis of 10-Q and 10-K filings, I find that the net disclosure tone predicts the insider purchase ratio (purchases scaled by the sum of purchases and sales), even after controlling for past purchases, return volatility and firm characteristics. Constructing a buy-and-hold portfolio over a six months horizon, I find that insiders earn approximately 5.8% abnormal return per year. Both disclosure tone and insider purchase ratio are able to predict the buy-and-hold abnormal return.

Insider Purchases Talk and Buybacks Whisper

With daily trades of directors’ purchases and share repurchase we find that the former is preceded by larger share price drops and trigger a better short- and long-term market performance. Further, when directors purchase shares with their own wealth they time the market by buying shares at a discount of 1.9% and 6.7% over the two and twelve months, respectively, surrounding these trades. In contrast, directors repurchase shares at a premium of 0.5% which reverts to zero over the two and twelve months, respectively, surrounding these trades, corroborating the price support hypothesis. Even when both trades occur within two days directors still purchase shares at a larger discount of 3% over the twelve months surrounding these trades. Finally, directors’ long-term incentive plans (accumulated shares) increase the likelihood of share repurchasing (directors’ purchasing) but are inversely related to the market valuation of these trades.