Strategic Informed Trading by Corporate Executives and Firm Value

48 Pages Posted: 9 May 2011 Last revised: 23 Jul 2013

See all articles by Katherine Gunny

Katherine Gunny

University of Colorado at Denver

Tracey Chunqi Zhang

Singapore Management University - School of Accountancy

Date Written: September 26, 2012

Abstract

Proponents of insider trading argue that informed trading benefits shareholders and could have a positive effect on firm value, however opponents counter that insider trading could be detrimental to firm value. We measure the extent of strategic informed trading by the fraction of insider trades that are V-shaped purchases (defined as insider purchases that are preceded by negative abnormal returns and followed by positive abnormal returns) and Λ-shaped sales (defined as insider sales that are preceded by positive abnormal returns and followed by negative abnormal returns). Our strategic informed trading proxy is negatively associated with future earnings performance and Tobin’s Q, even after controlling for the direction of insider trading intensity. We adopt the view that there could be frictions that prevent the board from setting the level of informed trading at the optimal level at any given time. We find that our measure of strategic informed insider trading is positively related to restatements, another possible manifestation of agency problems resulting from the same frictions. Moreover, strategic informed trading declines significantly after announcements of earnings restatements, which are usually accompanied with significant corporate governance improvement. Overall our evidence indicates that the type of informed trading we identify represents suboptimal informed trading that is detrimental to firm value – consistent with the opponent view of informed trading.

Keywords: Insider trading, informed trading, firm value, performance, restatements

JEL Classification: G34, M41

Suggested Citation

Gunny, Katherine and Zhang, Tracey Chunqi, Strategic Informed Trading by Corporate Executives and Firm Value (September 26, 2012). Singapore Management University School of Accountancy Research Paper No. 1, Available at SSRN: https://ssrn.com/abstract=1671542 or http://dx.doi.org/10.2139/ssrn.1671542

Katherine Gunny (Contact Author)

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

Tracey Chunqi Zhang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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