Skip to main content
Log in

Do corporate insiders circumvent insider trading regulations? The case of stock repurchases

  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

We use calculated values of standardized abnormal insider trading activity to investigate for patterns of unusual insider activity around fixed-price and Dutch auction repurchase announcements. Firms are classified according to whether the repurchase is signaling information about future cash flows, about the distribution of excess free cash flows, or about management's attempts to maintain control in the presence of a takeover. We find below normal levels of sales well before the event and above normal levels of sales after the event. This tendency is strongest for fixed-price offers and for firm's conveying information about future cash flows, and is absent for firms involved in takeovers. No evidence exists of abnormal levels of purchases before or after the event. We interpret the evidence as consistent with insiders successfully circumventing policies and regulations designed to prevent the exploitation of private information by timing the pattern of their security sales.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Allen, F. and D. Gale, “Stock Market Manipulation.” Review of Financial Studies 5, 503–529, (1992).

    Google Scholar 

  • Bagwell, L.S., “Dutch Auction Repurchases: An Analysis of Shareholder Heterogeneity.” Journal of Finance 47, 71–106, (1992).

    Google Scholar 

  • Comment, R. and G.A. Jarrell, “The Relative Signaling Power of Dutch-Auction and Fixed-Price Self-Tender Offers and Open-Market Share Repurchases.” Journal of Finance 46, 1243–1272, (1991).

    Google Scholar 

  • Conover, W.J., Practical Nonparametric Statistics, 2nd edition. New York: John Wiley & Sons. 1980.

    Google Scholar 

  • Dann, L.Y., “Common Stock Repurchases: An Analysis of Returns to Bondholders and Stockholders.” Journal of Financial Economics 9, 113–138, (1981).

    Google Scholar 

  • Elliot, J., D. Morse, and G. Richardson, “The Association Between Insider Trading and Information Announcements.” Rand Journal of Economics 18, 521–536, (1984).

    Google Scholar 

  • Givoly, D. and D. Palmon, “Insider Trading and the Exploitation of Inside Information: Some Empirical Evidence.” Journal of Business 58, 69–87, (1985).

    Google Scholar 

  • Hirschey, M. and J.K. Zaima, “Insider Trading, Ownership Structure, and the Market Assessment of Corporate Sell-Offs.” Journal of Finance 44, 971–980, (1989).

    Google Scholar 

  • Jensen, Michael, “Agency Costs of Free Cash Flow, Corporate Finance, and the Market for Takeovers.” American Economic Review 76, 323–329, (1988).

    Google Scholar 

  • John, Kose and Larry H.P. Lang, “Insider Trading Around Dividend Announcements: Theory and Evidence.” Journal of Finance 46, 1361–1390, (1991).

    Google Scholar 

  • John, Kose and R. Narayanan, “Market Manipulation and the Role of Insider Trading Regulations.” Working paper, New York University, 1994.

  • Kabir, R. and T. Vermaelen, “Insider Trading Restrictions and the Stock Market, Issue Announcements.” Working paper, INSEAD, 1991.

  • Karpoff, J.M. and D. Lee, “Insider Trading Before New Issues Announcements.” Financial Management 20, 18–26, (1991).

    Google Scholar 

  • Lang, Larry, Rene Stulz, and Ralph Walkling, “A Test of the Free Cash Flow Hypothesis.” Journal of Financial Economics 29, 315–335, (1991).

    Google Scholar 

  • Lee, D. Scott, W.H. Mikkelson, and M.M. Partch, “Managers' Trading Around Stock Repurchases.” Journal of Finance 47, 1947–1961, (1992).

    Google Scholar 

  • Meulbroek, Lisa K., “An Empirical Analysis of Illegal Insider Trading.” Journal of Finance 47, 1661–1699, (1991).

    Google Scholar 

  • Penman, Stephen H., “Insider Trading and the Dissemination of Firms' Forecast Information.” Journal of Business 55, 479–503, (1982).

    Google Scholar 

  • Pettit, R. Richardson and P.C. Venkatesh, “Insider Trading and Long-Run Return Performance.” Financial Management 24, (1995).

  • Vermaelen, T., “Common Stock Repurchases and Market Signaling: An Empirical Study.” Journal of Financial Economics 9, 139–183, (1981).

    Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Rights and permissions

Reprints and permissions

About this article

Cite this article

Pettit, R.R., Ma, Y. & He, J. Do corporate insiders circumvent insider trading regulations? The case of stock repurchases. Rev Quant Finan Acc 7, 81–96 (1996). https://doi.org/10.1007/BF00246000

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF00246000

Key words

Navigation