An empirical analysis of patterns in, and the informativeness of, director trading in the UK

Abstract

The key objective of this research is to examine various issues relating to trades of UK directors (insiders’) in their company shares. Specifically, we examine the general patterns and characteristics of directors’ trades, the seasonality patterns of aggregate directors’ trades (measured by insider aggregate number and value of insider trading activities), the impact that director’s age has on trade informativeness, and the effect of industry classification on the information content of directors’ trades. To the best of our knowledge, no empirical examination of these issues has yet to be examined. When examining the general patterns and characteristics of directors’ trades, we find that directors buy more frequently than they sell but the average value of sell trades are approximately seven times larger, which suggests that directors sell less frequently but in larger monetary amounts. Furthermore, the majority of trades occur for directors aged between 45 and 65. Small transactions tend to be purchases while large transactions tend to be sells. The majority of the trades were by former directors (for both transaction types) followed by executive and non- executive directors. The majority of trades occurred in the financial industry. When examining the seasonal patterns of aggregate directors’ trades (as measured by the number and the value of insider transactions), the results show that there is a day of the week anomaly in aggregate insider activities. Insiders tend to trade more on Fridays and less on Tuesdays. Also, there is a month of the year anomaly in aggregate insider activities (as measured by the number of insider transactions). Specifically, insiders tend to trade more in March and trade less in August. The impact of director’s age is also examined, and the results suggest that younger directors’ buy transactions produce significantly higher abnormal returns than older directors. There is some evidence of statistically significantly negative CAARs for younger directors’ sell trades. When controlling for director type, we find that younger executives (formers) are more informed about their buy trades than executives (formers) of other age groups. Unlike the previous pattern, older non-executives (over 70) seem to be more informed about their buy trades than younger non-executives. Finally, the results of whether industry classifications have an impact on the informativeness of directors’ trades indicate that abnormal returns are highest for directors of technology industries. The level of information asymmetry has an impact on the informativeness of directors’ trades. Specifically, insider gains are highest, for directors, in high R&D, high volatility, low regulated, highly concentrated, and low CEO compensation industries/sectors.