Are outside director trades informative? Evidence from acquiring firms

Rachel E. Gordon

International Review of Finance, 2021, vol. 21, issue 2, 447-477

Abstract: I show that nonroutine trades by acquirer outside directors premerger contain a significant amount of private information and these directors trade opportunistically on the information. I find that outside directors sell shares before less valuable deals and purchase shares before more value enhancing deals. Mergers with selling (buying) beforehand are associated with 22% lower (41% higher) announcement returns. Their trades provide more information than other insiders' trades, appear concentrated in harder‐to‐value firms, and intensify when more directors trade. Further, more outside directors appear to trade opportunistically in firms where the Chief Executive Officer (CEO) has significant power, suggesting agency problems may exist.

Date: 2021
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