Are All Independent Directors Equally Informed? Evidence Based on Their Trading Returns and Social Networks
Chinese University of Hong Kong (CUHK) - School of Accountancy
Dan S. Dhaliwal
University of Arizona - Department of Accounting
Shanghai University of Finance and Economics - School of Accountancy
Yong George Yang
Chinese University of Hong Kong (CUHK) - Faculty of Business Administration
May 1, 2011
We study the impact of social networks on the ability of independent directors to obtain private information from their firms’ executives. We find that independent directors socially connected to their firms’ senior executives earn significantly higher returns than unconnected independent directors in stock sales transactions, and the networks effect is stronger in firms with higher information asymmetry. Independent directors’ trading returns drop after their connected senior executives depart the firm. Finally, connected independent directors sell more stocks than unconnected directors prior to the announcement of bad earnings news. As a comparison to these results, the trading profits of connected and unconnected independent directors do not differ significantly in stock purchases. Taken together, our results suggest that social connections help independent directors gain access to private information from firms’ senior executives.
Number of Pages in PDF File: 33
Keywords: Social networks, insider trading, independent directors
JEL Classification: G34; G38; M48working papers series
Date posted: May 1, 2011 ; Last revised: December 22, 2012
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