What Do Insiders Know? Evidence from Insider Trading Around Share Repurchases and SEOs

Abstract

We examine the nature of information contained in insider trades prior to corporate events. Insiders’ net buying increases before open market share repurchase announcements and decreases before SEOs. Higher insider net buying is associated with better post-event operating performance, a reduction in undervaluation, and, for repurchases, lower post-event cost of capital. Insider trading predicts announcement returns and, for repurchases, the long-term drift following events. Overall, our results suggest that insider trades before corporate events contain information about changes both in fundamentals and in investor sentiment. Information about fundamentals is incorporated slowly into prices, while information about mispricing is incorporated faster.

Keywords: Insider Trading, Repurchases, Seasoned Equity Offers, Market Efficiency

JEL Classification: G14, G30, G32, G35