Insider trading and share repurchases: Do insiders and firms trade in the same direction? |
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| Institution: | 1. University of Kentucky, School of Management, Finance Area, 445J Gatton College of Business & Economics, Lexington, KY 40506, United States;2. University of Florida, Department of Finance Insurance & Real Estate, PO Box 117168, Gainesville, FL 32611, United States;1. New York University, New York, NY, USA;2. Temple University, Philadelphia, PA, USA;3. Securities and Exchange Commission, Washington, DC, USA;1. Utah State University, Department of Economics and Finance, Jon M. Huntsman School of Business, Logan, UT 84341, United States;2. Gonzaga University, School of Business Administration, 502 E. Boone Ave., Spokane, WA 99258–0009, United States;3. University of Alaska Anchorage, Business Administration Department, College of Business and Public Policy, Anchorage, AK 99508–4614, United States;1. Montana State University, 408 Jabs Hall, Bozeman, MT 59717, USA;2. Singapore Management University, 50 Stamford Road, 178899, Singapore;3. Shanghai University of Finance and Economics, 777 Guoding Road, Shanghai 200433, China;4. University of Oklahoma, 253 Adams Hall, Norman, OK 73019, USA;1. University of Oulu, Stockholm School of Economics, Aalto University School of Business;2. Department of Accounting, University of Oulu, P.O. Box 4600, FIN-90014, Finland;3. Department of Accounting, Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden;1. Izmir University of Economics, Department of Business Administration, Sakarya Caddesi, No:156 35330 Balçova, ?zmir, Turkey;2. Atilim University, Department of Business, K?z?lca?ar Mahallesi, 06830 ?ncek Gölba??, Ankara, Turkey |
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| Abstract: | 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. |
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