An Investigation into the Impact of Investor Relations on the Profitability of Director Share Trading
34 Pages Posted: 28 Nov 2006
Date Written: March 29, 2006
Investor relations are costly activities undertaken by firms to align the expectations of the shareholders with that of the company. These activities involve interactions with investors and analysts as well as voluntary information disclosures intended to reduce information asymmetry while increasing firm visibility (Brennan and Tamarowski, 2000; Bushee and Miller, 2005). Therefore, we expect a firm's investment in investor relations (IR) to also reduce private information held by directors, which results in less profitable share trading. We examine the investor relations policies and director share trading activity of S&P/ASX 300 firms from 2003 to 2004. The results show that with their purchases, directors in high IR firms earn higher returns than those in low IR firms. For sales however, a higher investment in IR lowers the losses avoided by directors. In addition, the price impact of directors' trades does not appear to vary with a firm's IR policy. These findings suggest that because directors trade for information and liquidity reasons, the impact of IR on the profitability of their trades differs between purchases and sales. This in turn can also be interpreted as inconclusive as to whether the practice of IR represents the disclosure of "new" information or simply a repackaging of public information.
Keywords: Investor Relations, Information Asymmetry, Insider Trading, Price Impact
JEL Classification: G14, G34
Suggested Citation: Suggested Citation