Insider Trading and Firm Performance Following Open Market Share Repurchase Announcements
29 Pages Posted: 25 Feb 2014
Date Written: January/February 2014
The long‐run performance of equity securities subsequent to announcements of open market repurchases (OMR) remains a contentious topic. In this paper we propose the “dichotomous expectations hypothesis” which posits that insider trading following share repurchase announcements reveals private information concerning the future operating performance of announcing firms. In particular, insider abnormal purchases (abnormal sales) should predict an improvement (decline) in operating performance that leads to higher (lower) long‐run stock returns. Our hypothesis offers a credible economic link between insider trading and subsequent long‐run stock performance through the intervening variable of operating performance. The empirical results show consistency with this linkage.
Keywords: open market repurchases (OMR), insider trading, long‐run performance
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