What Do Independent Directors Know? Evidence from Their Trading

55 Pages Posted: 5 Sep 2006 Last revised: 21 Aug 2011

Multiple version iconThere are 5 versions of this paper

Date Written: December 2007


We compare the trading performance of independent directors and other officers of the firm. We find that independent directors earn positive and substantial abnormal returns when they purchase their company stock, and that the difference with the same firm's officers is relatively small at most horizons. The results are robust to controlling for firm fixed effects and to using a variety of alternative specifications. Executive officers and independent directors make higher returns in firms with the weakest governance and the gap between these two groups widens in such firms. Independent directors who sit on the audit committee earn higher return than other independent directors at the same firm. Finally, independent directors earn significantly higher returns than the market when they sell the company stock in a window before bad news and around earnings restatements.

Keywords: Corporate Governance, Board of Directors, Trading Performance

JEL Classification: G30

Suggested Citation

Ravina, Enrichetta and Sapienza, Paola, What Do Independent Directors Know? Evidence from Their Trading (December 2007). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=928246 or http://dx.doi.org/10.2139/ssrn.928246

Enrichetta Ravina (Contact Author)

Kellogg School of Management ( email )

Evanston, IL 60208
United States
8474676872 (Phone)

HOME PAGE: http://https://sites.google.com/view/eravina/home

Paola Sapienza

Northwestern University - Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States
847-491-7436 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

United Kingdom

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