Information content of insider trading around corporate announcements: the case of capital expenditures
Article Abstract:
There is gathering evidence of insider trading around corporate announcements of dividends, capital expenditures, equity issues and repurchases, and other capital structure changes. Although signaling models have been used to explain the price reaction of these announcements, a usual assumption made in these models is that insiders cannot trade to gain from such announcements. An innovative feature of this paper is to model trading by corporate insiders (subject to disclosure regulation) as one of the signals. Detailed testable predictions are described for the interaction of corporate announcements and concurrent insider trading. In particular, such interaction is shown to depend crucially on whether the firm is a growth firm, a mature firm, or a declining firm. Empirical proxies for firm technology are developed based on measures of growth and Tobin's q ratio. In the underlying 'efficient' signaling equilibrium, investment announcements and net insider trading convey private information of insiders to the market at least cost. The paper also addresses issues of deriving intertemporal announcement effects from the equilibrium (cross-sectional) pricing functional. Other announcement effects relate the intensity of the market response to insider trading, variance of firm cash flows, risk aversion of the insiders, and characteristics of firm technology (growth, mature, or declining.) (Reprinted by permission of the publisher.)
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1990
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Efficient signalling with dividends, investment, and stock repurchases
Article Abstract:
The efficient mix of dissipative dividends, investments in real and financial assets, and repurchases of stock is computed for a continuum of firms with inside information about the return on risky real assets. In the efficient signalling equilibrium, the representative firm optimally distributes dividends, invests in risky real assets to maximize net present value, holds no financial securities, and sells new stock in the market. this firm finances its value-maximizing investment first from internal funds and second from stock sold to new investors. (Reprinted by permission of the publisher.)
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1988
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