Do managers trade consistently ? Evidence linking insider trading to actual share repurchase activity

Several studies suggest that managers are successful in identifying mispricing around stock repurchase. In addition, an established literature on insider trading also suggests that managers may have some timing skill. Yet a recent literature raises general concern as to the extent that managerial timing ability exists. We add to this literature by considering the interaction of buybacks done at the corporate level with concurrent trades made by insiders at a personal level. To the extent that managers are able to time valueenhancing repurchases, one might rationally expect insiders to also reveal these expectations in their personal trading behavior. While managers in repurchasing firms trade more actively compared to control firms, they surprisingly do not seem to utilize their informational advantage for personal gain. Even though we observe a close link between actual buyback activity and firm performance after share repurchases, the inconsistency we find between repurchases and insider trades raises some question as to the overall extent of managerial timing skill. On the other hand, the lack of any sympathetic trading on the part of insiders around repurchases may instead simply reflect reluctance by managers, or limitations place on them by the firm, to trade for personal gain around important corporate events. Prior to the regulatory framework established in the early 1980s, open market repurchase activity in the U.S. was comparatively low. Today, corporate attitudes have clearly shifted and open market repurchases are common worldwide. In many of these repurchase programs, a critical theme voiced by managers is that buybacks can increase shareholder value. For example, in a recent survey of CFOs, 43.3% of the respondents reported that the chief reason for buying back stock is “to add value for shareholders. ” A rich literature suggests that an important motivation for stock repurchases relates to mispricing where managers can enhance long-term shareholder value by repurchasing stock they perceive as trading below fair value. A key question is the extent to which managers are genuinely timing the market. Several recent papers offer alternative explanations and question whether long-term return drifts after some corporate events are due to mispricing (e.g., for seasoned equity offerings (SEOs) Lee (1997) raises the possibility of mangers mechanically making SEO decisions based on the market performance, Fama (1998) raises return measurement or methodological problems, and recently Schultz (2003) develops the notion of pseudo market timing in initial public offerings where the time series of offerings are predicated on past performance that induces a potential bias when the evidence is evaluated in the cross-section). Despite evidence of an initial positive market reaction to buyback announcements and a subsequent long-term drift, the notion of whether managers are able to time the market in repurchasing shares is an open empirical question. We address this issue by examining managers’ trading activities at both the individual and corporate levels subsequent to buyback announcements. If managers believe that their shares are undervalued, and if this is a key reason why the company is choosing to repurchase shares, one might 1 SEC rule 10b-18 was finally enabled in November 1982 after several years of debate. This guidance substantially reduced the litigation risk firms faced because of potential accusations about price manipulation. 2 As just a single example, consider the comments of Harvey Sanders, the CEO of the men’s sportware company Nautica Enterprises, on May 18, 2000 who said while announcing a $23 million repurchase program, “This action demonstrates our confidence in Nautica's future and our continued commitment to improving shareholder value. ” 3 Institutional Investor, July 1998, page 30. 4 See, for example, Vermaelen (1981), Dann (1981), Asquith and Mullins (1986), Comment and Jarrell (1991), and Chan, Ikenberry and Lee (2003).