Information content of insider filings after stock repurchase and seasoned equity issue announcements

Abstract

This paper examines the information content of insider filings after stock repurchase and seasoned equity issue (SEOs) announcements. We find that when firms and insiders trade in the same directions, the absolute value of the market reaction to insiders' purchase filings after stock repurchase announcements is larger than that to insiders' sale filings after SEO announcements. Thus, although insiders' sale filings after SEO announcements still suggest that the stocks are overvalued, the signals may be less informative owing to the confounding effect of some insiders' liquidity needs. When the firms and insiders trade in opposite directions, insiders' purchases after a firm's sale dominate insiders' sales after a firm's purchase, since insiders' purchase always convey positive information about a firm's future. When the firms and insiders trade in the same direction, the abnormal returns following purchases (or sales) depend on the type of insiders who make the trade. The positive (negative) abnormal returns following purchases (sales) decrease in absolute value according to the category of insiders, which is consistent with the information hierarchy hypothesis. When firms and insiders trade in opposite directions, the results are similar, but the magnitude is weak. Based on our results, the insiders who are more familiar with the day‐to‐day operations of the firm would trade on more valuable information than other insiders. Although following CEO trades more closely results in CEOs trading more cautiously, CEOs face less litigation risk and trade more on their informational advantages after event announcements.