Timing the market with own stock: an extensive analysis with buying and selling evidence

Abstract

Purpose Are firms able to time the market? The purpose of this paper is to focus on the study of own stock trading, emphasizing both repurchase and resell operations on the open market as well as over the counter. Design/methodology/approach The authors use data on 37,997 own stock transactions from 2005 to 2015 of Euronext Lisbon listed firms. Following Dittmar and Field (2015), this paper uses relative transaction prices to ascertain the relative performance of own stock transactions, in the open market and over the counter. Findings Results show that firms can time both repurchases as well as resales. Firms repurchase (resell) at lower (higher) prices than those prevailing in the market. Moreover, market-timing ability proves to be higher after the bailout period and to be influenced by the own stock trading frequency. Trading on the open market allows for increased timing ability for own stock repurchasing and reselling activity. Finally, results show seasonal effects both in repurchase and resale performance. Also, more efficient but less valuable firms are more likely to be successful in timing the market. Originality/value The authors study both the repurchasing and the reselling activity of the same set of firms, of already issued stock, using high-frequency (daily) data. In addition, the authors study own stock trading both in the open market and OTC, and also study the impact of a major economic shift on the firms’ ability to time the market.

Is Insider Trading Successful? An Extensive Analysis With Buying and Selling Evidence

“…This shows signs of market timing capabilities which are stronger when we look at a weekly time window. On the aggregate, when bridging insiders' results with firms own stock trading results studied by Santos and Gama (2019) as well as Dittmar and Field (2015), we verify that they go hand in hand in terms of performance, especially when looking at the buying activity. Interestingly and focusing on the selling, insiders even overperform firms as Santos and Gama (2019) show.…”

“…When looking at the selling activity, with the exception of the short-term (intraday) window, where there is no evidence of over (or under) performance, we showcase that insiders are actually selling their stock at a relatively higher price when compared to other traders in the market. This is especially interesting if we compare with the results of Santos and Gama (2019) where the authors found that firms reselling own stock are not able to time the market, thus we show that insiders, when performing private trades, outperform even their own institutional trading activity which can suggest the use of privileged information to optimize their timing when compared to a corporate and third-party perspective.…”

“…The Relative Transaction Prices (or RTP) approach, as in Santos and Gama (2019;2020), focus on comparing the average trading price paid (received) by an internal stakeholder during a specific period, the trade price (TP), and a pre-defined benchmark, the benchmark price (BP).…”

“…Methodology wise, we follow a relative transaction price approach by establishing event-date and benchmark specific windows (with different lengths, both centered and forward looking) similarly to Santos and Gama (2019;2020) but now with a focus on insiders' trades.…”

“…Here and differently fromSantos and Gama (2019;2020), we chose not to use a quarterly benchmark (66-day length) due to the differences in sample magnitude.21 June 2021, 15th Economics & Finance Virtual Conference, Prague ISBN 978-80-7668-004-3, IISES…”