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Asian Review of Financial Research, Vol., No..
pp.97~121
pp.97~121
Informed Traders : Linking legal insider trading and share repurchases
Konan Chan University of Hong Kong
David L. Ikenberry University of Colorado Boulder
Inmoo Lee Korea Advanced Institute of Science and Technology
Yanzhi (Andrew) Wang Yuan Ze University
Logic suggests that a link might exist between insider trades and share repurchases for their potential to signal mispricing when market prices deviate from fair value; both events emanate from essentially the same set of decision makers. A rich set of literatures suggests that executives have timing ability with respect to both events. However, several researchers view this collective evidence with suspicion and discount the notion that the evidence reflects fundamental mispricing or managerial timing. We address this debate by considering these two transactions jointly using publicly available information to form portfolios evaluated using performance metrics common to the asset management industry as well as those commonly used in academic studies. For ¡°value¡± buyback firms where the likelihood of undervaluation is seemingly a more plausible economic motivation for repurchases, insider trading provides a strong complement to the repurchase signal. The same is not true for other buyback cases where factors aside from mispricing may be motivating those repurchase decisions. Our evidence is consistent with prior studies which conclude that some managers do exhibit timing ability.
Konan Chan
David L. Ikenberry
Inmoo Lee
Yanzhi (Andrew) Wang
Logic suggests that a link might exist between insider trades and share repurchases for their potential to signal mispricing when market prices deviate from fair value; both events emanate from essentially the same set of decision makers. A rich set of literatures suggests that executives have timing ability with respect to both events. However, several researchers view this collective evidence with suspicion and discount the notion that the evidence reflects fundamental mispricing or managerial timing. We address this debate by considering these two transactions jointly using publicly available information to form portfolios evaluated using performance metrics common to the asset management industry as well as those commonly used in academic studies. For ¡°value¡± buyback firms where the likelihood of undervaluation is seemingly a more plausible economic motivation for repurchases, insider trading provides a strong complement to the repurchase signal. The same is not true for other buyback cases where factors aside from mispricing may be motivating those repurchase decisions. Our evidence is consistent with prior studies which conclude that some managers do exhibit timing ability.
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