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Insider Trading around Dividend Announcements: Theory and Evidence
Author(s) -
JOHN KOSE,
LANG LARRY H. P.
Publication year - 1991
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1991.tb04621.x
Subject(s) - insider trading , dividend , insider , business , monetary economics , dividend policy , explanatory power , financial economics , stock (firearms) , stock price , economics , finance , law , mechanical engineering , paleontology , philosophy , epistemology , series (stratigraphy) , political science , biology , engineering
The informational role of strategic insider trading around corporate dividend announcements is studied based on the efficient equilibrium in a signalling model with endogenous insider trading. Insider trading immediately prior to the announcement of dividend initiations has significant explanatory power. For firms with insider selling prior to the dividend initiation announcement, the excess returns are negative and significantly lower than for the remaining firms (with no insider trading or just insider buying) as implied by our model. Another implication is that dividend increases may elicit a positive or negative stock price response depending on the firm's investment opportunities.