Dichotomous Expectations and Insider Trading Following Open Market Repurchases

Abstract:     
The long-term performance of equity securities subsequent to announcements of open market repurchases remains a contentious topic. The current study examines insider trading surrounding the share repurchase event in order to ascertain whether private information may be one explanation for the long-term return performance of firms announcing open market repurchases. The dichotomous expectations hypothesis reflects two types of expectation of corporate insiders about firms’ prospects following the repurchase announcements. One is related to the creation of buyback bonanzas, suggesting that some insiders may use private information to sell their shares at attractive prices following the announcements of share repurchases. The other is related to informed buying, suggesting that some insiders of repurchasing firms may expect an improvement in future operating performance and use this information to initiate purchases for their own accounts. Overall, our results suggest that the post-event insider trades of repurchase firms reveal private information relevant to the future change in operating performance, which in turn is associated with the long-term financial market performance of repurchase firms. The evidence supports the dichotomous expectations hypothesis regarding insider trading and lends support to the non-homogeneity of open market repurchases.

Number of Pages in PDF File: 53

Keywords: Share repurchases, Insider trading, Long-run performance

JEL Classification: G14, G32

working papers series