Are Outside Director Trades Informative? Evidence from Acquiring Firms
55 Pages Posted: 21 Feb 2017 Last revised: 25 Jan 2019
Date Written: December 28, 2018
I show that nonroutine premerger trades by acquirer outside directors contain a significant amount of private information and indicate opportunistic trading on the information. I find that outside directors sell shares before less valuable deals and purchase shares before more value enhancing deals. Mergers with selling (buying) beforehand are associated with 22% lower (41% higher) announcement returns. Their trades are more informative than trades by other insiders, appear concentrated in harder-to-value firms, and intensify when more directors trade. Further, more outside directors appear to trade opportunistically in firms where the CEO has significant power, suggesting agency problems may exist.
Keywords: Insider trading, corporate governance, directors, mergers
JEL Classification: G14, G30, G34
Suggested Citation: Suggested Citation