Why are CFO Insider Trades More Informative?

Abstract:     
We examine whether the stronger information content of Chief Financial Officer (CFO) insider trading relative to that of Chief Executive Officers (CEOs) results from a different willingness to exploit the information asymmetry that exists between executives and outside shareholders (scrutiny hypothesis) or from differing financial acumen between CFOs and CEOs (financial acumen hypothesis). We consider the information content of equity purchases for CEOs, CFOs, and Chief Operating Officers (COOs). To test these hypotheses, we examine trading returns before and after the implementation of SOX in firms with high versus low regulation, in samples of dual executive role managers, and in samples of CEOs with prior CFO experience.

We provide evidence that SOX affected executives differently and provide support for the scrutiny hypothesis. CFO-based portfolios remain the most profitable post-SOX, but the magnitude of returns has fallen in absolute and relative terms compared to returns for CEOs and COOs. Superior financial acumen of CFOs does not appear to be supported. CEO purchase trade returns appear to be lower than CFO returns because CEOs face greater visibility and scrutiny and thus limit their own trading aggressiveness.

Number of Pages in PDF File: 26

Keywords: Insider trading, insider rank, executives, executive roles, CEO, CFO, COO

JEL Classification: G14, J33

working papers series