Does stardom affect the informativeness of a CEO's insider trades?

Abstract

This study examines whether the celebrity or star status of a chief executive officer (CEO) affects the informativeness of his insider trades. Using three different measures to identify star CEOs in a sample of S&P 1500 firms, we find that trades of non-star CEOs predict future abnormal returns and earnings innovations and that trades of star CEOs do not. The predictive power of non-star CEO trades is mostly attributable to opportunistic trades, not routine trades.We also find evidence suggesting that the abnormal returns associated with non-star CEO insider trades are due to the lower visibility and consequently less scrutiny of non-star CEOs compared with star CEOs. K E Y W O R D S chief executive officer, insider trading, opportunistic trade, routine trade, star J E L C L A S S I F I C AT I O N G14, G23, G29 INTRODUCTIONDoes the celebrity or star status of a chief executive officer (CEO) matter for the informational content and predictive power of his trades? The informational role of insider trading is not without debate. Cohen, Malloy, and Pomorski (2012) find that trades by non-senior insiders [insiders other than CEOs or chief financial officers (CFOs)] can predict future firm events better than trades by senior insiders. Wang, Shin, and Francis (2012) show that CFOs earn higher abnormal returns following their purchases of company shares than CEOs. Knewtson and Nofsinger (2014) find that because CEOs face more scrutiny than CFOs, CEOs limit their trading aggressiveness and their trades are less informative than trades of CFOs. Meanwhile, Ozkan and Trzeciakiewicz (2014) show that CEOs tend to purchase their own company shares more than CFOs do and that CEO purchases are more informative than those of CFOs. In this study, we focus only on CEOs and investigate whether the celebrity or star status of a CEO reveals the information content in his trading. SABHERWAL AND UDDINCEOs. Print and electronic media dedicate multiple issues to star CEOs, their success stories, and even their lifestyles.While existing literature attempts to identify whether star CEOs create more value for their firms and consequently for investors, no study has determined whether star CEOs offer superior information in trades that can be exploited by investors to create value for themselves. We attempt to do so by first arguing the opposite. Specifically, we first argue that the trades of non-star CEOs are likely to have informational content, and then examine whether the empirical evidence supports this argument.Insider trading by a CEO may reflect his private information or his liquidity needs, or both. Therefore, not all CEO trades are necessarily informed. Cohen et al. (2012) classify insider trades into two types: routine trades and opportunistic trades. Routine trades are usually motivated by liquidity needs (when insiders sell shares to finance consumption) or excess liquidity (when insiders receive a bonus and use it to buy shares), and opportunistic trades contain useful private information. We predict that trades by star CEOs (C...

Whose opinion matters when insiders disagree with short sellers?

“…This information hierarchy hypothesis posits that trades by senior executive officers (e.g., CEOs, CFOs, COOs) and board chairpersons will be more informative than trades by other insiders (e.g., non-executive officers and independent directors). However, empirical evidence shows that senior executives may trade with less information than other insiders as they are under greater pressure from the regulators (Fidrmuc, Goergen, & Renneboog, 2006;Sabherwal & Uddin, 2019). Hence, we conduct additional tests to examine whether the post-disagreement return is sensitive to different types of insiders.…”

“…Operating Income is operating income before depreciation scaled by total assets at the end of the previous fiscal year (y directors). However, empirical evidence shows that senior executives may trade with less information than other insiders, as they are under greater pressure from regulators (Fidrmuc, Goergen, & Renneboog, 2006;Sabherwal & Uddin, 2019). Hence, we conduct additional tests to examine whether the post-disagreement return is sensitive to different types of insiders.…”

“…Corporate insiders are natural information holders who trade against other traders due to their advanced private information or different perceptions of firms’ fundamental value (e.g., Sivakumar & Vijayakumar, 2001; Ke, Huddart, & Petroni, 2003; Sias & Whidbee, 2010). Prior studies find that insider buying signals stock underpricing and is followed by positive stock returns (Lakonishok & Lee, 2001; Cohen, Malloy, & Pomorski, 2012; Sabherwal & Uddin, 2019). If insiders and short sellers disagree because insiders have better private information than short sellers, we expect to observe positive subsequent abnormal returns following the disagreement.…”