EXECUTIVE ROLES AND INSIDER TRADING

Heather Susan Knewtson

My dissertation consists of two essays related to executive roles and insider trading. The first essay examines the information asymmetry that exists between managers and shareholders. However, managers are not one homogeneous group. Information asymmetry may exist amongst managers as well. I test this hypothesis using the trades of different Executive Role Groups. I find that all managers do not trade the same, suggesting they experience a different information environment within the firm. By splitting executives into three groups, which parallels their relative positions in firm hierarchies, I document differences in purchase and sales behavior, controlling for ownership levels, firm and managerial attributes. By forming portfolios based on insider trades, these differences are born out in subsequent excess returns. Information asymmetry is likely to vary across firms in differently regulated environments or vary across time as new laws are implemented to increase disclosure. I find that reduced information asymmetry in more heavily regulated firms results in lower insider trading returns for managers as a whole. However, insiders are unequally affected by this information asymmetry with the senior and junior executives benefiting from information asymmetry while the middle role group (of predominantly financial experts) not apparently exploiting the information asymmetry. The second essay examines whether the information content of certain executive insider trades reflects different trading skill or a different willingness to exploit the information asymmetry that exists between executives and outside shareholders. I consider the information content of equity purchase activity for chief executive officers, chief financial officers and chief operating officers using portfolios based on trading activity. Using the purchase activity of chief financial officers generates significantly higher daily excess returns than using either the purchase activity of chief operating officers or chief executive officers. Superior trading profitability of CFOs suggests that they are either more skilled at trading (skills hypothesis) or are more willing to use asymmetric information (information hypothesis). I test the skills hypothesis and find no evidence that different skill drives my results. Instead, I find evidence supportive of the information hypothesis with CFOs appearing to exploit asymmetric information in their insider trading.

EXECUTIVE ROLES AND INSIDER TRADING

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