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Insider Trading and Firm Performance Following Open Market Share Repurchase Announcements
Author(s) -
Chen HsuanChi,
Chen ShengSyan,
Huang ChiaWei,
Schatzberg John D.
Publication year - 2014
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12059
Subject(s) - insider , insider trading , business , equity (law) , monetary economics , stock (firearms) , market timing , open market operation , finance , economics , initial public offering , monetary policy , mechanical engineering , political science , law , engineering
The long‐run performance of equity securities subsequent to announcements of open market repurchases (OMR) remains a contentious topic. In this paper we propose the “dichotomous expectations hypothesis” which posits that insider trading following share repurchase announcements reveals private information concerning the future operating performance of announcing firms. In particular, insider abnormal purchases (abnormal sales) should predict an improvement (decline) in operating performance that leads to higher (lower) long‐run stock returns. Our hypothesis offers a credible economic link between insider trading and subsequent long‐run stock performance through the intervening variable of operating performance. The empirical results show consistency with this linkage.