If It's Good for the Firm,It's Good for Me: Insider Trading and Repurchases Motivated by Undervaluation

My findings suggest that information inherent in insider trading can be used to identify undervalued repurchasing firms. I examine the relation between insider trading and the performance of open market repurchase (OMR) firms. I show that firms with high net insider buying prior to OMR announcements not only earn abnormal stock returns in both the short‐ and long‐run, but also exhibit better operating performance. Overall, the evidence is consistent with insiders timing their trades prior to OMR announcements.     

Insider trading and share repurchases: Do insiders and firms trade in the same direction?

Signaling undervaluation is often considered a primary motive for repurchasing stock, but insider trading activity by repurchasing firms is not always consistent with undervaluation. Net insider buying and selling are both more frequent in quarters when firms are repurchasing non-trivial amounts of stock, with the odds of observing a repurchase the highest in quarters with net insider selling. In multinomial logit models, share repurchases associated with net insider selling are positively related to illiquidity, option exercises by insiders, and pre-repurchase returns and negatively correlated with industry-adjusted book to market ratios when compared to other repurchases. Hence, repurchases when insiders are selling stock are more likely done to support share prices or avoid dilution and are less likely undervaluation signals. We find that insider trades either validate or mitigate the undervaluation signal of the repurchase. Abnormal returns of repurchasing firms with net insider buying versus net insider selling in a given quarter are significantly higher for the quarter immediately after the repurchase and the three subsequent years. For repurchases accompanied by net insider selling, abnormal returns are negligible after only one year.     

The Relative Signalling Power of Dutch-Auction and Fixed-Price Self-Tender Offers and Open-Market Share Repurchases

We compare three forms of common stock repurchases. Dutch-auction self-tender offers and open-market share repurchase programs are weaker signals of stock undervaluation than fixed-price self-tender offers. The price increase from buyback announcements is greater when insider wealth is at risk, greater following negative net-of-market stock returns, and unrelated to prior market returns. Buyback announcement returns are also increasing in the fraction of shares sought, which is consistent with both signalling and an upward-sloping supply curve for stock.     

卖空者与内幕交易——来自中国证券市场的证据

本文研究上市公司内部人减持、年报、诉讼、分析师评级、停复牌以及高送转等重大公告前后卖空交易行为的变化,系统考察卖空者是否参与内幕交易以及何种因素影响卖空者参与内幕交易,发现卖空率较高的股票具有较低的未来收益,表明卖空者拥有信息优势,属知情交易者;卖空者拥有非常精确的择时交易能力,在重大利空公告前显著增加卖空量,而在利好公告前则显著减少卖空头寸,表明卖空者作为知情交易者的信息优势源自内幕消息;公司内、外部投资者的信息不对称程度越低或公司所在地的法治水平越高,卖空者参与内幕交易的行为就越少。因此,监管机构应密切关注公司重大消息发布前后卖空量的异常变动,同时,完善信息披露规则、健全证券分析师制度并强化法律法规的执行力度,才能有效防范卖空者参与内幕交易。     

AN EMPIRICAL INVESTIGATION OF STOCK DIVIDENDS-IN-KIND

We investigate share price reactions to announcements of dividends payable in the common stock of corporations different from the issuing firm. We find that firms that declare these dividends (typically investment companies) experience positive abnormal returns upon announcement. We also find that such dividends are more likely to be declared when the shares to be distributed have peaked in value. Consistent with this finding, we document negative announcement-period abnormal returns for firms having their shares distributed. Additional tests reveal that prices respond more negatively when the information signal is strongest, when outside ownership is more dispersed, and when management is more entrenched.     

EVIDENCE ON HOW COMPANIES CHOOSE BETWEEN DIVIDENDS AND OPEN-MARKET STOCK REPURCHASES

Dividends and open-market stock repurchases are by far the two most common mechanisms for distributing excess cash to shareholders. This article identifies and then tests three potentially important factors for the corporate choice between increasing cash dividends and initiating openmarket stock repurchases. More specifically, the authors argue that companies are more likely to distribute cash to investors through open-market repurchases than through dividend increases when (1) management believes its stock is undervalued, (2) management compensation packages include stock options, and (3) the company's stockholder base is dominated by institutional investors.
To test these three explanations, the authors use a matched-pair design in which each company announcing an open market repurchase program in a given year is matched with a comparable-size firm from the same industry that increased its cash dividends but did not initiate an open-market repurchase program. As predicted, the results suggest that equity undervaluation, management compensation, and the level of institutional holdings are all important contributors to corporate choices between dividend increases and open-market repurchases.     

OPEN MARKET REPURCHASES: THE VALUE FROM BUYING SHARES AT A DISCOUNT

This article shows that share repurchase announcements create value for shareholders when the shares of the industrial firm sell at a discount from the value of the underlying assets, even when shareholders and managers share full information about the firm's prospects and the firm's operating performance is not expected to improve. The value created by capturing the discount on the repurchased shares is a function of only two variables: the percentage discount prior to the announcement and the proportion of shares to be repurchased.
For a sample of 100 companies selling below net asset value, the authors report that the excess stock returns surrounding their announcements of open market repurchases are (significantly) positively associated with the authors' estimates of the value captured from buying shares at a discount. Moreover, the stock market's response to repurchase announcements by companies that are selling at a discount is considerably more positive than to announcements by firms selling at a premium.     

Insider Trading after Repurchase Tender Offer Announcements: Timing versus Informed Trading

Abnormally high net insider selling is commonly observed after repurchase tender offer (RTO) announcements although, on average, firms experience positive abnormal returns in the years after the repurchases. We explore two potential explanations: liquidity trade timing and informed trading. Consistent with the notion that fixed price RTOs are more likely than Dutch-auction RTOs to signal undervaluation, the results suggest that insider selling after fixed price RTO announcements are driven largely by insiders who time their trades with the repurchase announcements. In contrast, selling after Dutch-auction RTOs seems to be driven primarily by informed traders who exploit mispricing associated with the repurchase announcements.     

THE EFFECTS OF STOCK SPLITS ON THE OWNERSHIP MIX OF A FIRM

This paper examines the relationship between stock splits and the ownership mix of firms. Previous studies suggest that firms issue stock splits to lower their stock price into an optimal range so small investors can more easily afford to buy round lots. The results of this paper show a positive relationship between stock splits and institutional ownership but no effect on the firm's number of shareholders. Thus, the percentage of shares owned by individual investors decreases after a stock split. The inverse relationship between institutional ownership and a firm's total assets suggests that small firms use stock splits to attract attention from Wall Street.     

Insider Trading around Dividend Announcements: Theory and Evidence

The informational role of strategic insider trading around corporate dividend announcements is studied based on the efficient equilibrium in a signalling model with endogenous insider trading. Insider trading immediately prior to the announcement of dividend initiations has significant explanatory power. For firms with insider selling prior to the dividend initiation announcement, the excess returns are negative and significantly lower than for the remaining firms (with no insider trading or just insider buying) as implied by our model. Another implication is that dividend increases may elicit a positive or negative stock price response depending on the firm's investment opportunities.     

STOCK REPURCHASES AND SECURITYHOLDER RETURNS: A CASE STUDY OF TELEDYNE

This study examines securityholder returns around nine major repurchase announcements and 10 other repurchase-related announcements by the Teledyne Corporation between 1972 and 1984. Statistically significant positive excess returns to common stock and convertible preferred stockholders are documented. Contrary to prior research that investigated the average response to repurchase announcements, however, there is a wealth transfer from bondholders to stockholders. Bondholder returns around the repurchase announcements are significantly negative. These returns are examined for each announcement and each bond issue.     

Does common ownership constrain managerial rent extraction? Evidence from insider trading profitability

This study identifies a new economic benefit of common institutional ownership, which refers to the increasingly contentious phenomenon of U.S. firms sharing stockholders with their industry competitors. We find a significantly negative relation between common ownership and insider trading profitability. The disciplinary effect of common ownership on opportunistic insider trading is particularly evident when the information effects of common ownership are greater, when common owners are more likely to benefit from positive governance externalities, and in the subset of trades made by opportunistic insiders. Using the exogenous variations in common ownership induced by financial institution mergers, we conduct a difference-in-differences analysis and find consistent results. We also provide evidence that common owners encourage firms to impose ex-ante restrictions on insider trading and take ex-post actions to discipline opportunistic insiders by voting against management. Overall, our findings suggest that common institutional shareholders have information advantages, governance incentives, and effective means to constrain opportunistic insider trading.     

Stock splits to profit insider trading: Lessons from an emerging market

Stock splits have long presented financial puzzles: Why are they undertaken? Why are they associated with abnormal returns? Abnormal returns, particularly those coming shortly before a split’s announcement date, should raise strong suspicions of insider trading, particularly in nations with weak regulatory structures. We examined the 718 split events in the emerging stock market of Vietnam from 2007 through 2011. We found evidence consistent with illegal insider trading, particularly in firms that were vulnerable to insider manipulation and, therefore, more likely to split their stocks. When vulnerable firms’ stocks did split, they provided significant excess short-term returns. Tellingly, the abnormal returns on those stocks prior to the split announcements were also extremely high, indeed higher than their abnormal post-announcement returns. Moreover, trading volume increased prior to the split announcement date. This suspicious pattern is what we would expect if insiders were trading on their knowledge. We propose that illegal insider trading in contexts where it is possible to escape serious penalty provides a previously undiscussed and cogent explanation for both stock splits and abnormal short-term returns.     

Stock repurchases with legal restrictions. Evidence from Spain

This paper analyses the consequences of legal restrictions on the volume of shares firms can repurchase. Results suggest that the imposition of a limit on the volume of common stock favours the use of open market repurchases (OMRs) compared to other methods of repurchase such as tender offer repurchases (TORs) and Dutch auctions (DAs). The positive share abnormal returns around both announcements of open market buybacks and sellbacks in the full sample suggest that they are basically used to change the ownership structure of the firm in a consistent way with the convergence of interest hypothesis. The positive abnormal stock returns around open market repurchases, which are significantly different to the negative ones around sellbacks, when there are no changes in ownership structure also indicates the existence of a signalling and free cash flow effects.     

Management friendship and insider opportunism

This study documents a significant increase in both trading activity and profitability of opportunistic top managers when a CEO develops a strong connection with subordinate executives through co-opting the executives who share social ties with him/her. This baseline evidence is robust to endogeneity concerns, alternative measures of management connection and insider opportunism, as well as controlling for other CEO and board attributes. Further analyses reveal that interpersonal connections between top managers are more likely to increase opportunistic insider trading in firms with lower-quality voluntary disclosures, more sociable executives, and relaxing legal barriers to insider trades. Increased insider opportunism in response to the CEO’s connection with other top executives engenders less informative stock prices and depresses stock market liquidity. Finally, insider trades in firms with stronger management connection are more predictive of future stock returns.     

The Effects of Cash,Debt, and Insiders on Open Market Share Repurchases

The findings of the authors' recent study suggest, on balance, that stock repurchases function much like tax‐efficient special dividends, increasing when free cash flow is large and when debt levels are low, but not replacing regularly scheduled dividends. Repurchasing companies experience median event returns of about 2% around the repurchase announcements, with a related mean effect of roughly 3%. Companies with greater free cash flow and less debt are more likely than otherwise comparable companies to repurchase their shares. Furthermore, repurchasing companies that exhibit substandard preannouncement stock price returns and seek to buy back higher percentages of shares tend to elicit more positive stock price reactions. At the same time, the study provides some evidence that corporate managers attempt to use their inside information to profit from buybacks. For example, managing insiders in repurchasing firms decrease their selling activity and increase their buying activity two weeks before repurchase announcements to a greater extent than non‐managing insiders. But perhaps the most remarkable finding from this part of the study is how little insiders as a group seem to profit from their short‐term trading behavior—a finding that suggests that the market appears to anticipate much of this behavior.     

OPEN MARKET STOCK REPURCHASE PROGRAMS AND LIQUIDITY

In this paper I examine the behavior of bid and ask spreads and depths around announcements of open market stock repurchase programs. For a sample of 195 announcements from 1988 to 1990, I find statistically significant evidence of a small decline in spreads and no evidence of a shift in depths following the announcement date. Results are similar for a subsample of firms experiencing post-announcement declines in the number of shares outstanding. I conclude that open market repurchase programs as used recently do not adversely affect market liquidity.     

Insider Trading and Firm Performance Following Open Market Share Repurchase Announcements

The long‐run performance of equity securities subsequent to announcements of open market repurchases (OMR) remains a contentious topic. In this paper we propose the “dichotomous expectations hypothesis” which posits that insider trading following share repurchase announcements reveals private information concerning the future operating performance of announcing firms. In particular, insider abnormal purchases (abnormal sales) should predict an improvement (decline) in operating performance that leads to higher (lower) long‐run stock returns. Our hypothesis offers a credible economic link between insider trading and subsequent long‐run stock performance through the intervening variable of operating performance. The empirical results show consistency with this linkage.     

Do Long-Term Shareholders Benefit From Corporate Acquisitions?

Using 947 acquisitions during 1970–1989, this article finds a relationship between the postacquisition returns and the mode of acquisition and form of payment. During a five-year period following the acquisition, on average, firms that complete stock mergers earn significantly negative excess returns of ?25.0 percent whereas firms that complete cash tender offers earn significantly positive excess returns of 61.7 percent. Over the combined preacquisition and postacquisition period, target shareholders who hold on to the acquirer stock received as payment in stock mergers do not earn significantly positive excess returns. In the top quartile of target to acquirer size ratio, they earn negative excess returns.     

The information content of insider trading around seasoned equity offerings

This paper examines insider trading around seasoned equity offering (SEO) announcements in Hong Kong. The announcements of private placings (rights offerings) are associated with positive (negative) abnormal stock returns. However, longer-term stock returns are negative for both private placings and rights offerings. In general, insiders are net purchasers in placing firms in the 6 months prior to and 6 months subsequent to the SEO, whereas insiders are net sellers in rights issue firms in the 6 months prior to and 6 months subsequent to the issue. The net purchases made by the insiders of firms making placements help them maintain their control rights, which are otherwise diluted by the placements. Insider trading does not explain longer-term investment returns.