Informed Traders: Linking Legal Insider Trading and Share Repurchases

34 Pages Posted: 7 Dec 2010  

Konan Chan

National Chengchi University (NCCU)

David L. Ikenberry

Leeds School of Business, University of Colorado Boulder; University of Illinois at Urbana-Champaign - Department of Finance

Inmoo Lee

KAIST College of Business

Yanzhi Wang

Yuan Ze University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2010

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.

Suggested Citation

Chan, Konan and Ikenberry, David L. and Lee, Inmoo and Wang, Yanzhi, Informed Traders: Linking Legal Insider Trading and Share Repurchases (December 1, 2010). KAIST Business School Working Paper Series No. 2010-014. Available at SSRN: https://ssrn.com/abstract=1720808 or http://dx.doi.org/10.2139/ssrn.1720808

Konan Chan

National Chengchi University (NCCU) ( email )

No. 64, Chih-Nan Road
Section 2
Taipei, 11623
Taiwan
+886-2-29393091 ext 81239 (Phone)

David L. Ikenberry (Contact Author)

Leeds School of Business, University of Colorado Boulder ( email )

Boulder, CO 80309-0419
United States
303-492-1809 (Phone)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
340 Wohlers Hall
Champaign, IL 61820
United States
217-333-6396 (Phone)
217-333-4101 (Fax)

Inmoo Lee

KAIST College of Business ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 130-722
Korea, Republic of (South Korea)

Yanzhi Wang

Yuan Ze University - Department of Finance ( email )

135, Far-East Rd., Chung-Li
Taoyuan, ROC
Taiwan

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