Insider Trading around Stock Dividend Announcements
Date Issued
2008
Date
2008
Author(s)
Lin, Ting-Yu
Abstract
Few researches examine the cross-sectional variations in the market response to stock dividend announcements. In this paper, we investigate the interaction between the announcement effect and the insider trading prior to the stock dividend initiations to better understand how investors react to the stock dividend announcements. We examine 384 stock dividend initiations initiated by NYSE, AMEX and NASDAQ firms from 1985 through 2005.We stratify the sample based on insider trading activity within a specified time, say a quarter prior to the announcement day. We find that the 1-day excess returns on the announcement day are negative and significantly lower for firms with insider selling than for the remaining firms. Moreover, the 2-day cumulative abnormal returns are positive and significantly higher for firms with insider buying than the remaining firms. This suggests that insider trading immediately prior to the announcement of stock dividend initiations has significant explanatory power. Specifically, rather than viewing insider trading and stock dividends as additive independent signals, the market views them as complementary signals. However, there is no significant difference for the 2-day cumulative abnormal returns between firms with insider selling and those with no insider trading. This implies that stock dividend announcements reduce the negative valuation effect of abnormal insider selling. Stock dividends seem to be treated on average as good news by the market.
Subjects
stock dividend
insider trading
signaling hypothesis
cash substitution hypothesis
stock split
Type
thesis
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