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Review of Accounting Studies

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01.03.2006 | Original Article

Stock Market Anomalies: What Can We Learn from Repurchases and Insider Trading?

verfasst von: John E. Core, Wayne R. Guay, Scott A. Richardson, Rodrigo S. Verdi

Erschienen in: Review of Accounting Studies | Ausgabe 1/2006

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Abstract

We examine whether managers’ trading decisions (both at a firm and personal level) are correlated with trading strategies suggested by the operating accruals and the post-earnings announcement drift (SUE) anomalies. We discuss advantages and disadvantages of the use of managerial trading activity to infer managers’ private valuation about their own securities. Our results provide corroborative evidence for the accruals anomaly, i.e., managers’ repurchase and insider trading behavior varies consistently with the information underlying the operating accruals trading strategy. On the other hand, we do not find corroborative evidence for the SUE anomaly.

Vorheriger Artikel A Political–economic Analysis of Auditor Reporting and Auditor Switches

Nächster Artikel Do Short Sellers Target Firms with Poor Earnings Quality? Evidence from Earnings Restatements

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For example, suppose that a firm with very low accruals is identified by the accruals trading strategy as being undervalued and that executives of this firm use their inside knowledge of expected future cash flows to estimate the true equity value. If the executives believe the stock is undervalued, at the margin, they will buy shares on personal and firm accounts more heavily, thereby corroborating the accruals trading strategy.

See Jones and Litzenberger (1970), Foster, Olsen, and Shevlin (1984), Chan, Jegadeesh and Lakonishok (1996), and Ball and Bartov (1996), Bushee and Raedy (2003), among others.

All data items refer to the Compustat quarterly files.

As we discuss in more detail below, we measure the 6-month period to end 2 months after a quarter t. Accordingly, financial variables relevant to the repurchase decision are measured at quarter t−2, which ends 2 months prior to the computation of repurchase (and insider trading) data.

We delete firms in two-digit SIC codes that have an average of less than two observations per quarter.

Our inferences are unaffected if we do not control for lagged repurchases.

Specifically, for the five size quintiles (LOW to HIGH), the “no information” insider trading value is .60, .52, .45, .38 and .28, respectively.

Our choice to begin compounding 6-month returns 2 months after the quarter-end is consistent with that of Collins and Hribar, who compound starting 18 trading days after the earnings announcement. Our compounding strategy will start about 42 trading days after the quarter-end, where theirs will typically start roughly 48 trading days after the quarter-end (assuming that earnings announcements are usually made about 30 trading days after the quarter (Easton and Zmijewski, 1993)).

Bernard and Thomas (1989) and Collins and Hribar (2000) scale unexpected earnings by the standard deviation of the unexpected earnings. However, Bernard and Thomas (1990) show that the two approaches provide similar results.

As discussed in Section 3.1, our repurchase measure is censored at −3.85% to avoid the influence of secondary equity issuances. We note however that we obtain similar results if we use an uncensored measure of repurchases or if we censor the value of repurchase to zero to retain only decreases in shares outstanding (i.e., net repurchases only).

If we censor negative values of repurchase to zero as an alternative computation of repurchases, then we find that cash is positively related to repurchase consistent with previous literature such as Dittmar (2000).

We use data from 1989 to 2001, so we have 52 overlapping 6-month periods (ending every fiscal quarter) for each firm.

Our inference is unaffected if we instead run separate regressions for each anomaly.

In unreported tests we change our PRE- and POST-intervals to match the fiscal quarter. Specifically, the PRE-period ends at the end of the fiscal quarter and the POST-period starts in the beginning of the following quarter. Using these alternate windows we find consistent results with the accruals anomaly for both share repurchases and insider trading in both periods. For the SUE anomaly, the results are similar to the ones presented in the paper and inconsistent with the mispricing explanation.

Firms without share repurchase programs may find it too costly to start a repurchase program simply to take advantage of transient mispricing. Therefore, we repeat our analysis using 43,391 firms with some history of repurchasing shares. For this reduced sample we find results very similar to those reported in the paper.

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Titel: Stock Market Anomalies: What Can We Learn from Repurchases and Insider Trading?
verfasst von: John E. Core
Wayne R. Guay
Scott A. Richardson
Rodrigo S. Verdi
Publikationsdatum: 01.03.2006
Verlag: Kluwer Academic Publishers
Erschienen in: Review of Accounting Studies / Ausgabe 1/2006
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-006-6395-y

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