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What Do Independent Directors Know? Evidence from Their Trading

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  • Enrichetta Ravina
  • Paola Sapienza

Abstract

We compare the trading performance of independent directors and other officers of the firm. We find that independent directors earn positive and substantial abnormal returns when they purchase their company stock, and that the difference with the same firm's officers is relatively small at most horizons. The results are robust to controlling for firm fixed effects and to using a variety of alternative specifications. Executive officers and independent directors make higher returns in firms with weaker governance and the gap between these two groups widens in such firms. Independent directors who sit in audit committees earn higher return than other independent directors at the same firm. Finally, independent directors earn significantly higher returns than the market when they sell the company stock in a window before bad news and around a restatement announcement.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12765.

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Date of creation: Dec 2006
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Publication status: published as “What Do Independent Directors Know? Evidence from Their Trading,” with Enrichetta Ravina, forthcoming, The Review of Financial Studies, Volume 23, Number 3. March 2010. p. 962-1003
Handle: RePEc:nbr:nberwo:12765

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Cited by:
  1. Foucault, Thierry & Fresard, Laurent, 2014. "Learning from peers' stock prices and corporate investment," Journal of Financial Economics, Elsevier, Elsevier, vol. 111(3), pages 554-577.
  2. Cziraki, P., 2012. "Insider trading, shareholder activism, and corporate policies," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5590840, Tilburg University.
  3. Yogesh Chauhan & Chakrapani Chaturvedula & Viswanathan Iyer, 2014. "Insider Trading, Market Efficiency, and Regulation - A Literature Review," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 6(1), pages 007-014, June.
  4. Sharad Asthana & Steven Balsam, 2010. "The impact of changes in firm performance and risk on director turnover," Review of Accounting and Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 9(3), pages 244-263, August.
  5. Cole, Harold L., 2013. "Self-enforcing stochastic monitoring and the separation of claims," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(6), pages 632-649.
  6. Adams, Renée, 2008. "Communication in the boardroom," SIFR Research Report Series, Institute for Financial Research 61, Institute for Financial Research.
  7. Hans Degryse & Frank Jong & Jérémie Lefebvre, 2014. "An Empirical Analysis of Legal Insider Trading in The Netherlands," De Economist, Springer, Springer, vol. 162(1), pages 71-103, March.
  8. Brochet, Francois & Srinivasan, Suraj, 2014. "Accountability of independent directors: Evidence from firms subject to securities litigation," Journal of Financial Economics, Elsevier, Elsevier, vol. 111(2), pages 430-449.
  9. : Jana P. Fidrmuc & Adriana Korczak & Piotr Korczak, 2012. "Why does Shareholder Protection Matter for Abnormal Returns after Reported Insider Purcases and Sales?," Working Papers, Warwick Business School, Finance Group wpn12-03, Warwick Business School, Finance Group.
  10. Renée Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2008. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," NBER Working Papers 14486, National Bureau of Economic Research, Inc.
  11. Cook, Douglas O. & Wang, Huabing (Barbara), 2011. "The informativeness and ability of independent multi-firm directors," Journal of Corporate Finance, Elsevier, Elsevier, vol. 17(1), pages 108-121, February.

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