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We examine information content and related insider trading around private in-house meetings between corporate insiders and investors and analysts. We use a hand-collected dataset of approximately 17,000 private meeting summary reports of Shenzhen Stock Exchange firms over 2012–2014. We find that these private meetings are informative and corporate insiders conducted over one-half of their stock sales (totaling $8.7 billion) around these meetings. Some insiders time their transactions and earn substantial gains by selling (purchasing) relatively more shares before bad (good) news disclosures while postponing selling (purchasing) when good (bad) news is to be disclosed in the meeting. Finally, we conduct a content analysis of published meeting summary reports and find that the tone in these reports is associated with stock market reactions around (1) private meetings themselves, (2) subsequent public release of private meeting details, (3) subsequent earnings announcements and (4) future stock performance.     

Price,volume and spread effects associated with the expiry of lock-in agreements: Evidence from the Hong Kong IPO market

We examine the price, volume and bid–ask spread reactions to lock-in expiries in Hong Kong IPOs. We show that the lock-in expiry causes an increase in both trading volume and bid–ask spread, but no significant change in the share price. We attribute the absence of a price reaction to the fact that most of the Hong Kong IPO firms are controlled by one or two non-institutional shareholders who choose not to sell their shares after the lock-in expiry. Another plausible reason for the absence of a price reaction may be the period studied by this paper which follows the publication of a number of studies on lock-in expiry. The publication of the anomaly may have arbitraged away any gains internationally. The absence of significant abnormal returns around the lock-in expiry confirms the semi-strong form of the efficient market hypothesis. Our results are consistent with the European evidence, but contradict the findings of most US studies. We show that the volume and spread increases are not caused by the sales by locked-in insiders around the lock-in expiry. The volume increase may be caused by the presence of undisclosed insider transactions around the lock-in expiry. This may well be the case, since the insider trading disclosure requirement does not apply to transactions that result in a change of less than one percentage point to an insider holding. Finally, we show that the wider spread is likely to be caused by market makers charging high information rent to protect themselves against potential trading with informed insiders.     

Buyback behavior of initial public offering firms

We examine the motives behind the share repurchase decisions of initial public offering (IPO) firms by studying the stock and operating performance after the IPO date. We find that IPO firms that announce repurchases within 3 years of IPO dates exhibit poorer long-run abnormal operating performance than other IPO firms. These IPO firms also experience poorer stock return performance and downward analyst forecast revisions. Moreover, these firms show intensive insider selling transactions after the IPO date. These results for IPO announcing repurchase firms are consistent with the misleading hypothesis, which suggests that these IPO firms mislead investors by announcing repurchases as false signals.     

Insider Trading and Corporate Information Transparency

Our study examines the relation between insider trading and corporate information transparency. We find a negative relation between firms’ information transparency and the economic significance of insider trading, including the amount of insider purchase and sale and the profitability of insider transactions. We also find a negative relation between information transparency and stock price reaction to news of insider trading, which suggests that increases in information transparency preempt insiders’ private information. Our study provides evidence consistent with firms’ transparency-enhancing activities decreasing information asymmetry between insiders and investors by revealing insiders’ private information to investors in a timely manner.     

The Credibility of Voluntary Disclosure and Insider Stock Transactions

We examine stock price reaction to voluntary disclosure of innovation strategy by high‐tech firms and its relation with insider stock transactions before the disclosure. We find that, despite the qualitative and subjective nature of strategy‐related disclosure, there is positive stock price reaction to the disclosure. The evidence suggests that investors view the disclosure as credible good news. We also find that the disclosure is associated with more positive stock price reaction when it is preceded by insider purchase transactions. This evidence is consistent with insider purchase enhancing the credibility of the disclosure. The credibility‐enhancing effect is found to be stronger for firms with higher degrees of information asymmetry (younger firms, firms with lower analyst following, loss firms, and firms with higher research and development (R&D) intensity). Our evidence also indicates that predisclosure insider purchase is associated with greater future abnormal returns, suggesting that managers are privy to good news shortly before the disclosure.     

Information asymmetry and accounting restatement: NYSE-AMEX and NASDAQ evidence

We examine the impact of accounting restatement announcement on firms’ value and information asymmetry for both auction market (NYSE-AMEX) and dealer market (NASDAQ) using a public sample of restatement announcements from 1997 to 2005. In both markets, we document economically and significantly negative mean cumulative abnormal returns around the announcement dates. The restatements attributed to auditors are associated with more negative returns than those attributed to management and the SEC. However, there is no significant difference between market reactions arising from the core and non-core restatements. We also find a significant increase in volume, number of transactions, average order size, volatility, and various measures of spreads after the restatement announcement indicating that restatement announcements diminish company prospects and contribute to increased uncertainty and information asymmetry. Finally, we find that the information asymmetry in the NASDAQ market around the event date is less pronounced than in the NYSE-AMEX market.     

The causal effect of board size in the performance of small and medium-sized firms

Empirical studies of large publicly traded firms have shown a robust negative relationship between board size and firm performance. The evidence on small and medium-sized firms is less clear; we show that existing work has been incomplete in analyzing the causal relationship due to weak identification strategies. Using a rich data set of almost 7000 closely held corporations we provide a causal analysis of board size effects on firm performance: We use a novel instrument given by the number of children of the chief executive officer (CEO) of the firms. First, we find a strong positive correlation between family size and board size and show this correlation to be driven by firms where the CEO’s relatives serve on the board. Second, we find empirical evidence of a small adverse board size effect driven by the minority of small and medium-sized firms that are characterized by having comparatively large boards of six or more members.     

Directors’ share dealings and corporate insolvencies: evidence from the UK

This paper investigates the relation between insider trading and the likelihood of insolvency with a specific focus on the directors’ sale and purchase transactions preceding insolvency. We use a unique data set on directors’ dealings in 474 non-financial UK firms, of which 117 filed for insolvency, over the period 2000–2010. We show that the directors of insolvent firms increase their purchase transactions significantly as the insolvency approaches. The results also reveal a significant relation between three different measures of insider trading activity and the likelihood of insolvency, which is observed to be positive only during the last six-month trading period. The relation is negative for the earlier trading periods. While the earlier purchase transactions appear to be motivated by superior information held by insiders, the purchase trades closer to the insolvency date are possibly initiated by directors’ motives to influence the market's perception of the firm in an attempt to avert or delay insolvency.     

Do co-opted boards increase insider profitability?

Using a sample of U.S. firms over the period 1996–2014, this paper examines whether insider trading profitability increases with high board co-option. Indeed, we find that firms with a higher level of co-opted directors exhibit higher insider trading profitability, largely due to a lower level of managerial ability and analyst coverage. Co-opted boards are also unlikely to implement self-imposed insider trading restrictions, exacerbating this relationship. This positive association is mitigated by a higher level of external monitoring by institutional investors and if the CEO receives more performance-based incentives. Overall, co-opted directors demonstrate aligned interests with CEOs and corporate insiders rather than performing their role as monitors. As a result, a more co-opted board is positively associated with exploitative behaviour of insiders.     

BID-ASK SPREAD AND OWNERSHIP STRUCTURE

In this paper we examine the relation between bid-ask spread and ownership structure variables based on 1985 data for 1,063 NYSE firms. We document a nonpositive relation between bid-ask spread and insider ownership and conclude that spread is unrelated to insider trading. We also find a robust significantly negative relation between spread and institutional ownership. Finally, we find a positive but generally insignificant relation between spread and blockholdings. Overall, our evidence does not support the predictions of asymmetric information models in markets with anonymous trading.     

Can insiders bail themselves out before private renegotiation?

This study examines insider trading for a sample of firms that announce a workout agreement, controlling for both successful and unsuccessful workout attempts. I find that insider trading activity is related to the outcome of the workout proposal. Managers tend to bail out (sell shares) of firms that are unsuccessful in the workout process while they purchase shares prior to the workout announcements if the firms are ultimately successful in their workout. In addition, the evidence suggests managerial trading behavior is related to the workout market reaction. When a workout announcement is preceded by insider buying (selling), the stock price reaction is positive (negative). Overall, the evidence presented in this article is consistent with the notion that insider transactions convey private information to the stock market about a financially distressed firm.     

The Persistence of Opportunistic Insider Trading

We study the drivers of persistent insider trading profitability by examining the trades of insiders whose past trades have been profitable. We find that the current transactions of these persistently profitable (PP) insiders better predict firm performance than those of other insiders. The relative abnormal performance is more pronounced for trades of insiders who are managers rather than large shareholders or unaffiliated insiders and for trades in firms with weaker governance and greater information asymmetry. The trades of PP insiders also better predict earnings surprises, major corporate news, and analyst revisions. Collectively, these results indicate that PP insider transactions provide valid signals regarding future firm performance and that persistence in profitability is driven by informational advantages.     

Social Concentration on Boards,Corporate Information Environment and Cost of Capital

Prior evidence on the relationship between demographic diversity in corporate boards and firm performance is mixed. Some studies have found that the relationship between board attributes and firm performance is driven by a firm's information environment. This study examines whether corporate transparency also impacts the relationship between gender and ethnic diversity of directors and firm performance. To test this hypothesis, I use a Herfindahl Index based on directors’ gender and ethnicity to measure board diversity, and an opacity index based on analyst following, analyst forecast error, bid‐ask spread, and share turnover to measure corporate transparency. I find that the cost of capital is positively associated with social concentration on corporate boards and that this premium is larger for highly opaque firms. In further analysis, I find that the interaction of corporate information environment and social concentration on boards is more important for operationally complex firms. Compared with simple firms, operationally complex firms pay a greater premium on their capital if they have a socially concentrated board and an opaque information environment.     

Why does shareholder protection matter for abnormal returns after reported insider purchases and sales?

We use a unique data set of more than 240,000 reported insider transactions across 15 European countries and the USA to analyze the link between country-level shareholder protection and abnormal returns following insider trades. We show that abnormal returns after insider transactions are positively correlated with country-level shareholder protection against expropriation by corporate insiders, which supports the information-content hypothesis. Market reaction to insider purchases increases with shareholder protection because shareholder protection enhances the transparency and trustworthiness of insiders’ actions, and limits possibilities for direct profit diversion, so that more information is eventually reflected in stock prices. For insider sales, shareholder protection decreases their negative information content. We conjecture that this is due to the effect of greater transparency and trustworthiness strengthening the diversification and liquidity reasons for selling in better shareholder protection countries. We find limited support for the rent-extraction hypothesis that conjectures that shareholder protection is associated with insider trading dollar profits.     

DO SCANDALS TRIGGER GOVERNANCE CHANGES? EVIDENCE FROM OPTION BACKDATING

We examine whether firms charged with backdating option grants make discernible changes to board structure and activity and whether such changes help recoup value losses from the revelation of option backdating. We find that these firms increased board size, reduced duality, and increased board independence. In addition, the boards and the compensation committees of these firms experienced significant increases in meeting frequency. We also find that firms in the same sectors that had not been identified as backdating option grants experienced similar changes in board activity and some elements of board structure. Additional analysis reveals that increases in board size, chief excutive officer turnover, and the meeting frequency of the audit committee are related to buy‐and‐hold abnormal returns in the postscandal period.     

Poison Pill Securities: Shareholder Wealth and Insider Trading

Existing empirical studies on poison pill securities have examined their overall effect on shareholder wealth. This paper segregates the wealth-increasing poison pills from the value-reducing ones by examining the pattern of insider trading activity prior to the pill adoption announcement. Our results show that pill adoptions that are preceded by net insider purchases are associated with significant stock price increases. This finding is consistent with the proposition that corporate insiders buy their own securities because they do not view the adoption of poison pills as an antitakeover strategy, but rather one that enables the board of directors to extract a greater share of the economic gains from the bidder. Our findings also indicate that firms with net insider sales prior to pill adoption announcement experience generally negative but insignificant changes in value. Finally, firms with no insider trading or with an equal number of insider purchases and sales register marginally significant negative returns.     

Do related party transactions affect family firm valuations?

We examine the likelihood and value relevance of related party transactions in family firms. Based on an extensive hand-collected sample, we find that founder-led family firms are more likely to enter into related party transactions than other firms. We also find that the founder-led family firm valuation premium is reduced when these firms disclose related party transactions, especially opportunistic related party transactions. We also examine the significant change in related party transaction reporting regulations enacted in 2006 and find that it led to a decline in the number of value-decreasing related party transactions for founder-led family firms. We find a corresponding decrease in the detrimental effect of related party transactions on founder-led family firms’ valuation. Our results suggest that changes in the 2006 SEC related party transaction reporting regulations better protected minority shareholders from wealth extraction via related party transactions in founder-led family firms.     

Mimicking insider trades

We examine whether outside investors mimic insider trades by analyzing the daily transactions of foreign institutional investors (FII) in the Indian emerging market. We find that the value relevance of insiders' opportunistic buy trades is much higher in our context relative to that reported for developed markets. More importantly, we find that FII mimic opportunistic buy trades, which is more pronounced for firms that are informationally more opaque or have lower corporate governance quality. A long-short strategy based on FII's transactions after opportunistic trades generates an additional abnormal return of approximately 29% annually, compared to transactions based on routines trades.     

Insider trading and the long-run performance of new security issues

This paper uses insider trading around new security issues to provide evidence of managerial timing ability. I show that insider sales increase and purchases decrease prior to issues of information-sensitive securities (convertible debt and equity) by industrial firms. I then examine the relation between insider trading and subsequent stock returns. Although not all equity issues are motivated by overvaluation, those where managers sell prior to the issue are more likely to be. I find that industrial firms with abnormal insider selling underperform in the long run, whereas those with abnormal buying do not. There is no evidence of a relation between abnormal selling and future performance for utility offerings, however. Overall, the evidence is consistent with poor long-term performance being due to overvaluation.     

Underpricing,Share Overhang,and Insider Selling in Follow‐on Offerings

Prospect and information‐momentum theories predict that insiders can offer fewer shares in an initial public offering (IPO) to create informational momentum and obtain higher prices in follow‐on offerings. I find that dilution and insider participation in the IPO are negatively related to the number and size of follow‐on offerings, consistent with the prediction. However, insider selling in follow‐on offerings is positively related to IPO selling, contrary to the theories. Returns around follow‐on offering announcements are more negative for newly public firms than older firms, but for newly public firms do not differ by whether the announcement comes before or after the lockup expiration date.