Idiosyncratic Risk and Corporate Transactions
Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)
Darren T. Roulstone
Ohio State University (OSU) - Fisher College of Business
March 1, 2010
It has been documented that insiders trade when they perceive their firms are mispriced and when they hold private information about future cash flows. Based on these findings, we test whether insiders at firms with high-idiosyncratic risk (which is associated both with financial anomalies and with greater private information in prices) earn higher returns to their trades than insiders at firms with lower idiosyncratic risk. We document that, indeed, the profitability of corporate transactions (insider purchases and sales, and share repurchases) increases dramatically with idiosyncratic risk. Corporate transactions are contrarian and the magnitudes of returns prior to and following trades increase with idiosyncratic risk. In further analyses, we find little evidence that these patterns relate to private information: they are not explained by common proxies for future cash-flow news and are not mitigated by increased regulatory oversight of insider trading since mid-1990s. Conversely, we document evidence indicating that high-idiosyncratic risk stocks are priced less efficiently: institutional investors are slow to respond to corporate transactions and prices following trades drift for several months.
Number of Pages in PDF File: 50
Keywords: Limits to Arbitrage,Insider Trading,Repurchases,Seasoned Equity Offerings,SEO,Arbitrage,Institutional investors,private information,public information,market frictions,managers,equity issuance,abnormal returns,idiosyncratic risk,corporate governance,directors,managers,disclosure,arbitrageurs,returns
JEL Classification: G11, G12, G14, G32, G35working papers series
Date posted: March 16, 2010 ; Last revised: April 12, 2010
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 0.375 seconds