Informed Traders: Linking Legal Insider Trading and Share Repurchases

Abstract

Logic suggests a link might exist between insider trades and share repurchases for their potential to signal mispricing when market prices deviate from fair value; both events emanate from essentially the same set of decision makers. A rich set of literatures suggests that executives have timing ability with respect to both events. However, several researchers view this collective evidence with suspicion and discount the notion that the evidence reflects fundamental mispricing or managerial timing. We address this debate by considering these two transactions jointly in the context of portfolios which better reflect trading in realtime and also using performance metrics commonly adopted in practice. For "value" buyback firms where mispricing is a more pragmatic economic motivation, insider trading does indeed provide a strong compliment to the repurchase signal. We find that that mispricing appears to be a key factor motivating at least some repurchase announcements and that managers do exhibit some degree of timing ability.