What Do Independent Directors Know? Evidence from Their Trading

We compare the trading performance of independent directors and other executives. The findings reveal that independent directors earn positive substantial abnormal returns when they purchase their company stock, and that the difference from the same firm's executives is relatively small at most...

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Bibliographic Details
Published in:The Review of financial studies 2010-03, Vol.23 (3), p.962-1003
Main Authors: Ravina, Enrichetta, Sapienza, Paola
Format: Article
Language:English
Subjects:
Abnormal returns
Audit committees
Business executives
Business structures
Comparative analysis
Corporate governance
Datasets
Directors
Executive committees
Executives
Financial transactions
Outside directors
Sales transactions
Scandals
Securities trading
Statistical significance
Studies
Trade
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Summary:We compare the trading performance of independent directors and other executives. The findings reveal that independent directors earn positive substantial abnormal returns when they purchase their company stock, and that the difference from the same firm's executives is relatively small at most horizons. We also find that executives and independent directors make higher returns in firms with the weakest governance, the gap between these two widens in such firms, and that independent directors sitting on the audit committee earn higher returns than other independent directors at the same firm. Independent directors also earn significantly abnormal returns when they sell the company stock in a window before bad news and around earnings restatements.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhp027