What Do Independent Directors Know? Evidence from Their Trading

56 Pages Posted: 22 Dec 2006 Last revised: 19 Nov 2022

See all articles by Enrichetta Ravina

Enrichetta Ravina

Federal Reserve Bank of Chicago; Center for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Paola Sapienza

Northwestern University - Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: December 2006

Abstract

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 weaker governance and the gap between these two groups widens in such firms. Independent directors who sit in audit committees 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 a restatement announcement.

Suggested Citation

Ravina, Enrichetta and Sapienza, Paola, What Do Independent Directors Know? Evidence from Their Trading (December 2006). NBER Working Paper No. w12765, Available at SSRN: https://ssrn.com/abstract=951921

Enrichetta Ravina (Contact Author)

Federal Reserve Bank of Chicago ( email )

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Center for Economic Policy Research (CEPR) ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Paola Sapienza

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

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United States
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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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