Director Networks and Informed Traders

48 Pages Posted: 16 Jan 2014 Last revised: 26 Jul 2016

See all articles by Ferhat Akbas

Ferhat Akbas

University of Illinois at Chicago

Felix Meschke

University of Kansas - Finance Area

M. Babajide Wintoki

University of Kansas - School of Business

Date Written: April 5, 2016

Abstract

We provide evidence that sophisticated investors like short sellers, option traders, and financial institutions are more informed when trading stocks of companies with more connected board members. For firms with large director networks, the annualized return difference between the highest and lowest quintile of informed trading ranges from 4% to 7.2% compared to the same return difference in firms with less connected directors. Sophisticated investors better predict outcomes of upcoming earnings surprises and firm-specific news sentiment for companies with more connected directors. Changes in board connectedness are positively associated with changes in measures of adverse selection.

Keywords: Director networks; Informed Trading; Corporate Directors; Short Sellers; Board of Directors; Board Size

JEL Classification: G12, G14, G18

Suggested Citation

Akbas, Ferhat and Meschke, Felix and Wintoki, Modupe Babajide, Director Networks and Informed Traders (April 5, 2016). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2378655 or http://dx.doi.org/10.2139/ssrn.2378655

Ferhat Akbas

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60076
United States

Felix Meschke (Contact Author)

University of Kansas - Finance Area ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
(347) 433-5495 (Phone)

HOME PAGE: http://www.business.ku.edu/faculty/meschke-felix/

Modupe Babajide Wintoki

University of Kansas - School of Business ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

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