Do managers trade consistently? Evidence linking insider trading to actual share repurchase activity *

Transcription

1 Do managers trade consistently? Evidence linking insider trading to actual share repurchase activity * Konan Chan National Taiwan University David Ikenberry University of Illinois at Urbana-Champaign Inmoo Lee Korea University September 2003 * Chan is at the Department of Finance, National Taiwan University, 50, Lane 144, Keelung Rd, Sec 4, Taipei 106, Taiwan (Phone: and [email protected]), Ikenberry is at the Department of Finance, University of Illinois at Urbana-Champaign, 340 Wohlers Hall, 1206 South Six Street, Champaign, Illinois (Phone: (217) and [email protected]), and Lee is at the College of Business Administration, Korea University, 1 5-ga, Anam-dong, Sungbuk-gu, Seoul ,Korea (Phone: and [email protected]). We appreciate helpful comments from Gustavo Grullon, Michael Habib, Jan Jindra, Jonathan Karpoff, Ranga Narayanan, Tim Loughran, Raghu Rau, Jay Ritter, Ajai Singh, Nathan Stuart, René Stultz, Ralph Walkling, and Michael Weisbach. Lee acknowledges financial support from the Asian Institute of Corporate Governance at Korea University.

2 Do managers trade consistently? Evidence linking insider trading to actual share repurchase activity Abstract Several studies suggest that managers are successful in identifying mispricing around stock repurchase. In addition, an established literature on insider trading also suggests that managers may have some timing skill. Yet a recent literature raises general concern as to the extent that managerial timing ability exists. We add to this literature by considering the interaction of buybacks done at the corporate level with concurrent trades made by insiders at a personal level. To the extent that managers are able to time valueenhancing repurchases, one might rationally expect insiders to also reveal these expectations in their personal trading behavior. While managers in repurchasing firms trade more actively compared to control firms, they surprisingly do not seem to utilize their informational advantage for personal gain. Even though we observe a close link between actual buyback activity and firm performance after share repurchases, the inconsistency we find between repurchases and insider trades raises some question as to the overall extent of managerial timing skill. On the other hand, the lack of any sympathetic trading on the part of insiders around repurchases may instead simply reflect reluctance by managers, or limitations place on them by the firm, to trade for personal gain around important corporate events.

3 Prior to the regulatory framework established in the early 1980s, open market repurchase activity in the U.S. was comparatively low. 1 Today, corporate attitudes have clearly shifted and open market repurchases are common worldwide. In many of these repurchase programs, a critical theme voiced by managers is that buybacks can increase shareholder value. 2 For example, in a recent survey of CFOs, 43.3% of the respondents reported that the chief reason for buying back stock is to add value for shareholders. 3 A rich literature suggests that an important motivation for stock repurchases relates to mispricing where managers can enhance long-term shareholder value by repurchasing stock they perceive as trading below fair value. 4 A key question is the extent to which managers are genuinely timing the market. Several recent papers offer alternative explanations and question whether long-term return drifts after some corporate events are due to mispricing (e.g., for seasoned equity offerings (SEOs) Lee (1997) raises the possibility of mangers mechanically making SEO decisions based on the market performance, Fama (1998) raises return measurement or methodological problems, and recently Schultz (2003) develops the notion of pseudo market timing in initial public offerings where the time series of offerings are predicated on past performance that induces a potential bias when the evidence is evaluated in the cross-section). Despite evidence of an initial positive market reaction to buyback announcements and a subsequent long-term drift, the notion of whether managers are able to time the market in repurchasing shares is an open empirical question. We address this issue by examining managers trading activities at both the individual and corporate levels subsequent to buyback announcements. If managers believe that their shares are undervalued, and if this is a key reason why the company is choosing to repurchase shares, one might 1 SEC rule 10b-18 was finally enabled in November 1982 after several years of debate. This guidance substantially reduced the litigation risk firms faced because of potential accusations about price manipulation. 2 As just a single example, consider the comments of Harvey Sanders, the CEO of the men s sportware company Nautica Enterprises, on May 18, 2000 who said while announcing a $23 million repurchase program, This action demonstrates our confidence in Nautica's future and our continued commitment to improving shareholder value. 3 Institutional Investor, July 1998, page See, for example, Vermaelen (1981), Dann (1981), Asquith and Mullins (1986), Comment and Jarrell (1991), and Chan, Ikenberry and Lee (2003). 1

4 hypothesize that managers might also rely on this same information for trading at the personal level. For example, Seyhun (1986) and more recently Lakonishok and Lee (2001) find that insider trades are informationally motivated, even after controlling for the contrarian trading style managers often follow. At the individual level, we examine insider trading behavior, and at the company level, we examine actual buyback activity. We form a comprehensive sample of 5,508 U.S. repurchase announcements from 1980 to 1996 and examine the relation between managers trading and performance of share repurchasing firms. Consistent with previous studies, we find significant long-term stock return drifts after share repurchase announcements. However, when we consider whether managers use this information for personal gain, we find that overall they do not. Even though previous studies on insider trading find that managers are seemingly good at identifying when their shares are mis-priced (Lakonishok and Lee (2001) and Seyhun (1986)), our evidence suggests that managers, on average, do not seem to trade around the repurchase event to their advantage. For example, in cases where managers bought stock in the year following the repurchase announcement, a seemingly bullish sign, the 4-year abnormal return is lower (9.31% (p-value = 0.002)) compared to cases where we see only insider selling (29.94% (p-value = 0.008)). If we focus more narrowly on value stocks where one might argue that mispricing is more likely to be motivating a repurchase, the conclusion does not change. In fact, in value-repurchases where managers were buying new stock following the buyback announcement, point estimates of long-horizon excess performance are actually negative. Contrary to the insider trading evidence, performance subsequent to actual repurchase activity is seemingly consistent with the market timing. When companies do repurchase stock, abnormal performance grows from 5% in the first year to almost 22% after four years. However, when no shares are repurchased, first year abnormal return is higher, 9% (a result consistent with the notion that buyback activity being contingent on market behavior), but the four-year abnormal return is lower, 15%. For value firms, the difference is more striking. Here, the four-year abnormal return is 25% when managers actually 2

5 buy back shares. This contrasts with those cases when no shares are repurchased and the long-term drift for value stocks is essentially zero. These results suggest an inconsistency in manager trading behavior and draw into question their overall timing ability. Even though managers seem to make repurchase trades that time the market at the corporate level, this is not supported with sympathetic behavior at a personal level. One possibility may be that buyback and insider trades are not so similar. For example, it may be the case that managers feel pressure from outside investors to buy back stock in response to past market declines, pressure that does not affect their personal trades. This behavior is seemingly consistent with Shultz s (2003) notion of pseudo market timing where the ex-ante expected return of a decision is zero, yet a prior market performance dependent clustering of the flow of announcements creates the appearance in the cross section of timing ability. These forces do not exist though for managers who exercise their own discretion when trading at a personal level. As such, the link between insider trading and corporate level trading decision might be severed. Managers may lack genuine timing skill at a personal level, yet their corporate level decisions to repurchase shares may be shaped by forces that create pseudo market timing with their share repurchase programs. This explanation is consistent with the findings in Lee (1997) for primary seasoned equity offering firms. However, this story leaves open the question as to why previous studies that consider unconditional insider trading behavior (e.g., Jaffe (1974), Seyhun (1986) and Rozeff and Zaman (1988)) conclude that managers appear to be informed and have some timing skill. 5 An alternative explanation may simply be that managers may have timing ability as revealed in the manner they time their share repurchase decisions, yet during these times when the firm is in the market, they choose to not trade either voluntarily or because of company regulation. Bettis, Coles and Lemmon (2000) document extensive limitations placed on insider trading behavior. They find that many firms either restrict or prohibit insider trading except within specific windows of time, typically following key information events such as earnings releases. Some firms go further and require company approval 5 Sehyun (1988) presents evidence that shows insiders abilities to time the market in aggregate based on the aggregate insider trading. 3

6 for all manager trades. These rules certainly restrict manager trading behavior at the personal level and may be responsible for the lack of any meaningful link between insider trading and the return performance of repurchasing firms. The remainder of the paper is organized as follows. Section I describes the data and the methods used in the paper. Section II presents the results on insider trading around share repurchase announcements. Section III describes the empirical results and Section IV provides some concluding remarks. I. Data and Methods A. Data We obtain our sample from two sources. The first consists of open market repurchase programs reported in the Wall Street Journal from January 1980 to December 1990 and is the sample from Ikenberry, Lakonishok, and Vermaelen (1995). This is supplemented with announcements recorded at Securities Data Corporation over the full period, 1980 to As in previous studies, we ignore announcements that occurred in the fourth quarter of 1987 to reduce clustering. In addition, to mitigate a portion of the skewness problem that can be observed in long-horizon returns, we drop firms whose share price at the time of repurchase announcement is below $3 (Loughran and Ritter (1996)). We consider trading activity in this paper, both on behalf of insiders as well as on behalf of the firm. For insider trading information, the complete record for insider trades is obtained from the Securities and Exchange Commission s Ownership Reporting System data files. We define insiders as directors and officers. We include trades made both on the open market and through private transactions. We also consider whether insider purchases or sales are associated with the exercise of stock options. Finally, to focus on economically significant transactions, we exclude insider transactions involving less than 100 shares. We calculate company repurchase activity using the Compustat quarterly cash flow statements on 4

7 funds used to redeem stock, adjusted for concurrent changes in preferred stock. 6 Stephens and Weisbach (1998) show that a substantial portion of the repurchase activity is completed in the first year. 7 Thus, we focus our examination on company buying activity in the first year following the announcement. Due to missing and incomplete data, we unfortunately lose about 30% of observations whenever we condition our sample on company buying activity. B. Methods We measure long-term stock return performance using buy-and-hold returns (BHRs). We calculate annual BHRs by compounding daily returns for 252 trading days to comprise one year. We then consider up to four years of returns subsequent to the repurchase announcement. Abnormal stock returns and abnormal insider trading activity are calculated based on the market-cap and book-to-market ratio (B/M) adjusted control-firm approach. Five firms with similar market-cap and B/M are chosen as control firms for each repurchasing firm. In addition, to deal with potential problems with the use of standard parametric statistical tests in long-term performance studies, we use an empirical simulation method or bootstrap for statistical tests. A more complete motivation for this approach along with precise details of this technique is provided in the appendix. II. Insider Trading around Share Repurchase Announcements A. Summary Statistics for Different Insider Trading Groups We begin by considering general insider trading patterns around stock repurchase announcements. Within a given firm at any point in time, managers may have heterogeneous and idiosyncratic trading needs. To reduce the noise this may create, we consider extreme cases where we exclusively observe only buying or selling activity. Throughout the paper, we classify our sample firms as pure purchasers (PP), pure sellers (PS), and mixed trader (MT) based on their insider trading activity in the year after the 6 Stephens and Weisbach (1998) and Jagannathan, Stephens and Weisbach (2000) try different approaches to measure the magnitude of actual repurchases due to the difficulties of measuring this. They show that the method used in this paper usually overestimates the actual repurchases magnitude compared to other methods. However, this is not a major concern here since we just focus on whether firms repurchased any shares during the first year after the announcement, rather than the magnitude of actual share repurchases. 7 To the extent that mis-pricing is indeed motivating a repurchase, looking at activity near or about the time of the 5

8 repurchase announcement, the same period we use to examine actual repurchase activity. 8 PP are those repurchasing firms whose insiders bought shares without any selling during the one year period after announcements on the open market and through private transactions, as well as through the exercise of options that were not sold within the next six months. PS are similarly defined. To avoid picking up selling activity simply triggered by the arbitrary expiration of options 9 in identifying sales activity for PS, we exclude those sales that occurred within six months after an option exercise. Cases that are not classified as PP or PS are labeled as MT. The trading composition of MT is quite varied and includes a larger number of firms where no trades were observed at all. Table I reports summary statistics for each insider trading group. Focusing on PP, insiders make, on average, 4.9 trades worth $0.36 million. Insiders in PS sell more frequently and for a substantially greater dollar amount, 5.8 trades worth $2 million, respectively, during the one-year period after announcements. The size of PP firms is slightly smaller than that of non-pp firms although B/M quintile ranks tend to be comparable across the various groups. Table I also reports abnormal returns in the year prior to the announcement. During this period, mean abnormal stock returns are not only poor, but are generally uniform across the various insider trading groups. Results range from -8% for MT firms to -10% for PP firms and -11% for PS firms. The timing of the repurchase announcement is consistent with a contrarian-type strategy taken by insiders (Lakonishok and Lee (2001)). The size of the repurchase program is also consistent across the various insider trading groups. At the bottom of Table I, we report both in dollars and in % of market-cap the value of shares actually bought back by companies over the first year following the program announcements. We see that PP and MT companies are more active repurchasers and show higher completion rates than PS. Consistent with repurchase seems appropriate. We did investigate other time intervals, however the conclusions were stable. 8 We report evidence using insider activity subsequent to the buyback announcement due to potential bias in preannouncement activity. If insiders in some cases anticipate a pending repurchase announcement, they may hesitate to trade on personal account due to the potential legal or internal compliance problems. Nevertheless, our conclusions do not change if we consider insider trades prior to the announcement. 9 Ofek and Yermack (2000) find that managers on average sell a substantial fraction of shares they acquire as their 6

9 Stephens and Weisbach (1998), many announced buybacks are not completed during the first year of their respective programs. B. More Detailed Insider Trading Information In this section, we carefully examine insider trading patterns over a period two years before and after the share repurchase announcement date. We compare insider trading activity in the buyback firm to that of a benchmark set of control firms formed on the basis of market-cap and B/M. 10 This controlled comparison is important as Lakonishok and Lee (2001) find that insiders typically trade as if they are contrarian investors. Managers tend to increase their buy transactions following periods of relatively low return performance and sell more after high return periods. By controlling for B/M in our matching firms, we indirectly control for past stock performance given the close relation between B/M and past returns (Fama and French (1992) and Lakonishok, Shleifer, and Vishny (1994)). Furthermore, firm size is also important to consider. Seyhun (1986) and Lakonishok and Lee (2001) find that although insiders in smaller firms tend to trade less often, the proportion of buy to sell transactions is much higher than otherwise. By considering insider trading behavior relative to this benchmark, we can carefully evaluate the marginal degree of trading in share repurchase firms not associated with or explained by systematic firm characteristics. Table II summarizes insider trading activity around share repurchase announcements. Panel A shows the findings for the overall sample. As reported in column Purchase, insider purchases are significantly more common among repurchasing firms both prior to and following the announcement compared to their matching firms. For example, during the six-month interval prior to the announcement, insiders make on average 0.88 purchase trades compared to 0.61 purchase trades in matching firms. In the following two years, insiders in repurchase firms appear to buy more frequently compared to control firms. The difference between these groups is significantly different from zero in all but the first sixexecutive stock option grants mature. 10 Previous studies that examine insider trading around share repurchases (e.g., Lee, Mikkelson and Partch (1992) for fixed price tender offers and Raad and Wu (1995) for open market share repurchases) do not control for both size and B/M in examining abnormal insider trading behavior. For example, Lee, Mikkelson and Partch (1992) use a 7

10 month period we report. We also examine the frequency of option exercises around repurchase programs. This is an important issue since one frequently cited motivation for a share repurchase program, particularly in recent years, is to avoid dilution when executives are exercising stock options (Fenn and Liang (2001) and Weisbenner (2000)). Yet even if dilution, as often heard in the popular press, was not a main issue managers might be expected to announce a stock repurchase to reduce the negative signal otherwise construed by the selling associated with stock they acquired through their exercised options. Table II shows that repurchase programs are indeed associated with the exercise of options. As shown in the Option Purchase column, insiders in repurchasing firms exercise their options significantly more frequently than their peers in matching firms. However, many of these trades are subsequently reversed within the next six-month period. This result is presented in the Option-No Sales column which illustrates the number of purchases through the exercise of options, that are not sold within the next sixmonth period. Surprisingly, insider selling is also significantly more common both before and after a repurchase announcement. 11 We also report the number of sales transactions that are not likely related to the prior option exercises. Here, we treat sales as option related if they occur soon (within six months) after the option is exercised and if the insider trade involves the same individual and the number of shares sold are less than or equal to the number of shares acquired through the prior exercise of options. The results show that both option-related and non-option-related sale transactions are significantly more common among repurchasing firms around the announcement of share repurchases. Even after controlling for optionrelated sales, selling by insiders in repurchase firms is high. Insiders in these firms are apparently more aggressive traders in comparison to those in the firms of similar size and B/M characteristics. Theory suggests that firms repurchase shares for a variety of reasons. For example, in firms with control firm approach but they control only for size. 11 Lee, Mikkelson, and Partch (1992) do not report increased insider selling by repurchasing firms after the announcement. However, this may be due to their choice of benchmark, which adjusts only for size. 8

11 high B/M ratios, or value stocks, undervaluation may be a predominant factor. In many of these cases, B/M ratios are high because stock performance in prior years has also been quite low. For low B/M ratio firms, or growth stocks, other reasons such as returning excess cash or providing an alternative to a taxable dividend may be more predominant factors. 12 To explore these issues, we examine trading patterns for various B/M groups, and report the results in panel B, C, and D of Table II. Consistent with the results of Lakonishok and Lee (2001), insider sales are indeed higher in growth firms relative to value firms. In Table II, we see buying levels of value and growth firms are roughly comparable, but non-option related insider sales level in growth stocks is more than twice of that observed in value stocks. Shifting attention to value firms, the frequency of insider purchase transactions in repurchasing stocks is noticeably higher in the six-month period prior to the announcement. Following the announcement, the difference in buying activity narrows. In addition, sales by insiders of repurchasing value-firms, though substantially below that observed in growth stocks, is still above that observed in control stocks. Moreover, these sales generally are not option related. To examine whether the results in Table II are robust to different ways of classifying insider trading activity, Figure 1 reports the proportion of firms with net buying and net selling around the announcement date. The qualitative results are similar to those in Table II. Considering the results in previous research that sample firms are outperforming even one year after a repurchase announcement, the increase in insider sales is not consistent with managers knowingly timing the stock repurchase. While one hesitates to read too much into selling activity by managers given their total exposure to the firm, this evidence is not consistent with what one would expect if managers were able to identify misvaluation around share repurchase announcements. 12 This is not to suggest undervaluation does not play a role in share repurchases in growth stocks. Managers in some low B/M firms may have insight into mispricing not recognized in the marketplace and thus initiate a share repurchase. On the other hand, low B/M firms typically have experienced favorable stock returns in the recent past. To the extent that such success translates into hubris, managers in these firms may mistakenly perceive undervaluation that, ex-post, does not materialize. 9

12 III. Long-Run Stock Performance A. Returns conditional on insider trading Table III reports the long-run abnormal returns for different insider trading groups. The results are unexpected in the sense that we do not find any compelling indication that managers are trading on personal account in a manner sympathetic with the decisions they are making for shareholders overall. Focusing on Panel A, while all three categories of repurchases show varying degrees of positive longhorizon performance, cases classified as PP do not show overly impressive results. Instead, the four-year abnormal return drift is actually higher in PS firms (29.94% (p=0.008)) than it is for PP firms (9.31% (p=0.002)). Moreover, we see comparatively similar results when we look at this relation across the various B/M categories. For growth repurchasing firms where managers are uniformly buying shares, four-year abnormal stock returns are significant (10.42% (p=0.058)), but not as high as those of growth firms in PS. For value firms, the raw returns are high compared to what one might expect for equity returns in general, yet these results are not impressive when compared to that of matching control firms. Overall, the positive abnormal return drift does not seem to be concentrated on PP firms but instead is most evident in MT and PS firms. One possibility is that our approach to classify firms as buyers and sellers was not adequately separating informed trades. As a check, we considered numerous alternative classification schemes. 13 To save space, this work is not reported here, however, none of these techniques had any material difference on the results. B. Returns conditional on actual buyback activity Open market programs, by definition, allow substantial flexibility (Ikenberry and Vermaelen 13 Following the insider trading literature, we use four different ways to identify the insider buying group: net buying, intensive buying, relatively significant buying, and historically significant buying. Net buying represents firms with greater number of purchases than sales during the one-year period after repurchase announcement. Intensive buying represents firms with at least three more purchases transactions than sales transactions. Relatively significant buying represents firms with at least three more net purchases (the number of purchases minus the number of sales) than the average number of net purchases of five size-and-b/m-adjusted matching firms. Historically, significant buying represents firms with at least three more net purchases during the one-year period after the announcement than the average net purchases during the one-year period prior to the announcement. 10

13 (1996), Jagannathan, Stephens, and Weisbach (2000)). In fact, some firms choose not to repurchase any shares at all (Stephens and Weisbach (1998)). To the extent that managers are responding to undervaluation when authorizing repurchase programs, but the market does not fully react to this information at the announcement, we expect firms to exploit this mispricing by actually repurchasing shares. In other cases where undervaluation may be less of a driving issue or the market fully incorporates the information content of share repurchases at the announcement, we expect to see lower repurchase activity. In Table IV we examine actual buyback activity. We sort sample firms with available company buyback information into two groups on the basis of whether they repurchased at least some stock versus cases where no stock was bought at all in the year following the repurchase announcement. Overall, when companies do repurchase stock, abnormal performance grows from 5.07% in the first year to 21.86% after four years. In cases where no shares are repurchased, the pattern in abnormal performance is different. Here, the abnormal return in the first year is comparatively much higher, 9.24%, a result consistent with the notion that managers may feel less compelled to buy back stock when share prices are rising. 14 However, by year four, the return drift is 14.63%, which is lower than otherwise if firms actually repurchase at least some shares. When we separately examine the returns of value vs. growth repurchase firms depending on their actual buyback activity, both value and growth firms behave consistently with acting in a way of increasing shareholders value. When managers in value (growth) companies are actually repurchasing shares, the four-year abnormal return is 24.63% (30.70%). In value or growth firms where managers chose not to buy stock, we do not find any evidence of abnormal performance. Therefore, the close link between actual buyback activity and performance is present not only for value stocks that are more likely to be undervalued but also for growth stocks. However, for the mid B/M firms, both actual buy firms and 14 This result is consistent with Ikenberry, Lakonishok and Vermaelen (2000) who find that Canadian companies tend to buy back fewer shares when abnormal stock returns are high. 11

14 non-buy firms generate significant long-term abnormal returns. C. Combining insider trading and actual company trading activity The evidence in the previous two sections provides mixed results as to managerial timing ability. When we examine trades made on behalf of all shareholders (actual repurchase activity), the results suggest that managers may have some timing ability and are acting in the best interests of shareholders. Yet when we examine trades made on behalf of only managers (insider trades), the results are not so supportive. To check whether we can resolve this inconsistency, we include Table V. Here, we divide each insider trading group into two groups according to whether firms repurchased any shares in the year following the repurchase announcement. To the extent that managers are acting in the best interest of shareholders, we should find that the abnormal return drift is comparatively higher when the company is buying back stock, irrespective of how managers trade on personal account. However, if they exploit their information advantage not only for shareholders but also for themselves, we should find the abnormal return drift being higher when both the company and managers are buying stock. Unfortunately, the sample size in many of these cells becomes quite small, thus it is important not to over interpret this evidence. Yet based on point estimates, managers seem to be generally trading in the best interest of shareholders despite the fact that they may not be doing so well on personal account. For example, in the PS set, firms which were also buying back stock have a four-year abnormal return drift of 30.71% compared to -0.85% for other PS firms which did not choose to buy back. Similarly for the MT group, the four-year abnormal return for cases where firms were buying back stock is 23.65% compared to 15.58% when they were not. Turning attention to Panels B through D which sort firms on the basis of B/M, a similar picture emerges. The only exception occurs in PP group where we don t see any evidence that firms with actual purchase activity outperform those without. This may be due to the noisy data in our limited sub-sample. Yet, on average, long-term shareholders are better off when firms are buying back 12

15 shares as opposed to when they are not, regardless of managers personal trading patterns. In addition, even when managers purchase both at the personal and company levels, repurchasing firms do not impressively outperform, compared to others. Overall, the results suggest that the long-term performance of repurchasing firms relates more to actual buyback activity rather than to managers personal insider trading. Next, we consider this in a multivariate setting to see whether the results hold, controlling for other factors. D. The Multivariate Evidence Table VI reports regression results where the long-horizon evidence that we evaluated on a univariate basis earlier is now considered in a multivariate setting. To model insider trading, we use dummy variables to indicate whether firms are PP or PS. We also consider a continuous measure of how much companies actually repurchased in the post-announcement year, namely, log (1 + % actual repurchase). We further interact this variable with the high B/M dummy indicator to see whether actual buyback activity plays different roles for value stocks that are more likely to be undervalued. In addition, we control the size of buyback programs and the abnormal returns prior to repurchase announcements. We begin by evaluating abnormal returns in the first year subsequent to the repurchase announcement (models 1 to 4). Here, some of the independent variables are measured during the interval when dependent variables are measured. Therefore, these regression analyses are used not to predict the returns using the independent variables but to understand the relationship between abnormal returns and explanatory variables. The coefficients of book-to-market and percentage of shares announced to repurchase are not significantly related to the first year return. Consistent with Table III, firms with pure insider buying underperform other repurchasing firms by about 6% in the first year, while pure insider sellers have better abnormal returns, though not significant. Regarding the role of actual buyback activity, neither the percentage of actual repurchase variable nor the interaction term with B/M ratio is significant. This suggests that price pressure from actual repurchase activity is likely not contributing to the overall drift after repurchase announcements. 13

16 Turning to the four-year abnormal return evidence (models 5 to 8), we see some evidence supportive of firms repurchasing shares due to undervaluation. For example, we see significant results for the size of the repurchase program; larger programs appear to be associated with a larger drift in four-year returns (model 5 and 8). Further, when we consider either the full sample (model 6 and 7) or value firms where undervaluation is more likely to occur (model 8), we find significant results associating actual repurchase activity with a higher post-announcement drift. However, repurchasing firms where managers are buying stock still exhibit a lower long-run return drift. In sum, the results from this multivariate analysis are consistent with our earlier univariate evidence and suggest that managers in repurchasing firms do take advantage of mispricing. Larger repurchase programs and programs where managers buy back more stock are associated with larger fouryear drifts. Moreover, this result is evident for value stocks where one might argue that the a priori potential for mispricing is seemingly higher. However, regarding the issue of whether managers are trading consistently at the individual and company levels, the results suggest otherwise. Even after controlling for other factors, managers do not appear to use their informational advantage for personal gain while they seem to be able to utilize their information advantage for shareholders. IV. Conclusions An empirical literature has developed suggesting that managers may be able to time certain corporate events. The list of transactions is quite long and includes, for example, dividend initiations, exchange listings, stock splits and mergers. Within this literature, several studies indicate that managers appear to have the ability to time the flow of equity into and out of the firm. Yet, several recent papers question this apparent timing ability. In this paper, we revisit this idea as to whether managers are knowingly aware of mispricing and able to time the market by considering managers trading behavior on behalf of the company and separately on behalf of themselves. We look at 5,508 open market share repurchase programs announced 14

17 by U.S. firms between 1980 and As previous studies document, the evidence here also shows positive, long-horizon abnormal return drifts after repurchase announcements. This evidence is seemingly consistent with the hypothesis that managers are able to identify and respond to mispricing in the market. Yet when we examine insider trades around share repurchase announcements, we find no compelling evidence that managers are trading sympathetically with the repurchase program. Looking more carefully, we do not find any evidence that performance is higher when managers are exclusively buying stocks on personal account. In fact, the evidence is counter-intuitive; abnormal returns tend to be higher when insiders are selling stocks compared to when they are buying following repurchase announcements. In contrast, when we focus on decisions made on behalf of the company regarding actual repurchase decisions, managers do demonstrate some timing ability. Abnormal returns are higher for firms that did buy back shares after the announcement compared to firms which did not repurchase any shares. This conditional performance is particularly evident in value-stock repurchases where undervaluation conceivably might be an important motive in the timing of the repurchase. One possible explanation for this inconsistency in manager trading behavior is that while the same manager is making decisions on both a personal and corporate level, these two decisions may not be so comparable. Specifically, managers may be subject to external pressures either from their board or from investors to repurchase stock after market declines, pressure that does not arise when they trade for personal reasons. Such conditional repurchase buying on behalf of the firm is consistent with pseudo market timing hypothesis offered by Schultz (2003). If managers are motivating their repurchase programs on the past market performance, one might observe a long-run drift in the cross-section even though expected abnormal returns of share repurchasing firms over time are in fact zero. Yet on a personal level, insiders will not face this same pressure to buy. As such, if managers lack a genuine timing ability, this might explain why or how it is that their corporate trades appear to be informed while their personal trades appear otherwise. Interestingly, Lee (1997) finds similar results when considering 15

18 insider trades around seasoned equity offerings. Although insider selling that he focuses on is generally thought to be less informative compared to buying, as we focus on here, he too finds a lack of sympathetic insider trading activity. While these results point in the direction that insiders, on average, may lack timing ability, this still leaves unanswered the broader question as to how it is that the broader literature of insider trading (papers such as Jaffe (1974), Seyhun (1986) or Rozeff and Zaman (1988)) shows different results. These papers which evaluate insider trades overall and not conditionally as we do here reach the conclusion that at least some insider trades on a personal level appear to be informationally motivated and that managers may have some timing skill. An alternative explanation that may reconcile these dispirit findings is perhaps more simple. While it may be the case that managers have some informational advantage and thus some timing ability (thus the drifts we see subsequent to repurchases and insider trades when looked at individually), they are aware of the fact that their insider trades are widely disseminated in the market place. The apparent absence of a relation or linkage between insider trading and abnormal performance around an important corporate event such as a share repurchase may simply reflect managers reluctance to actively trade on behalf of both themselves and company shareholders at the same time. Given the potential for litigation, managers may voluntarily choose to avoid acting ways that the market might perceive as self-dealing. This reluctance to trade may be further re-enforced by the firm s own legal counsel. Bettis, Coles and Lemmon (2000) find a widespread use of self-imposed trading restrictions on insiders. More than 92% of the firms in their sample had specific policies regarding insider trading. Roughly three out of four firms prohibit all forms of trading except within a specific window of time. Some firms go further and actually require the company approval before managers are able to trade. These rules, taken together, may have a chilling effect on both a manager s ability and desire to trade their own stock. Furthermore, given the wide publicity and close scrutiny that insider trades receive in the marketplace, managers may simply choose to avoid any trades that might be construed as associated with their share repurchase programs. As 16

19 such, insider trading around important corporate events like a share repurchase may not be so informative. In summary, managers are not trading on personal account in a manner consistent with what they do at a corporate level when repurchasing stock. Contrary to what one might expect, there is no close link between insider trading and the performance of share repurchasing firms. However, when we look more carefully at the timing of actual buyback activity we find some evidence suggestive of managerial timing ability. One interpretation is that this inconsistency in managerial trading behavior reflects their inability to predict future stock returns. As such, the return drifts subsequent to a stock repurchase shown here and in prior studies may be evidence of pseudo market timing rather than an indication of informed management. This interpretation would be consistent with a recent literature that raises suspicion as to the general timing ability of managers. Alternatively, the surprising lack of any linkage between share repurchases and sympathetic trading on personal account by managers may be due to a reluctance managers to show the appearance of trading for personal gain around important corporate events such as a repurchase. These limitations may be reinforced by company policy as well. As such, managers may have timing ability which they utilize on corporate account, but which they concurrently choose to not exercise when trading on personal account. 17

20 Appendix Methodologies in Estimating Long-Run Returns A. Performance measures annual and long-run buy-and-hold returns We measure long-horizon return performance using buy-and-hold returns (BHRs). The BHR approach is attractive because its implied investment strategy is simplistic and captures the investing experience of a long-horizon investor (Barber and Lyon (1997a)). The common alternative approach, cumulative abnormal returns (CARs), implicitly assumes frequent rebalancing and therefore implies high associated transaction costs not reflected in the return numbers. Frequent rebalancing also raises concerns about upward biases due to bid-ask bounce (Conard and Kaul (1993)). For each repurchase firm in our sample, we calculate annual BHRs for the year before and the four years following the repurchase announcement. The total return for year +1 is obtained by compounding daily returns for 252 trading-days starting from the repurchase announcement date. Thus implicitly, the announcement period return is incorporated in the year +1 return. 15 Returns in years +2, +3, and +4 are computed by compounding corresponding 252-trading day intervals. For each event year, the portfolio annual BHR for repurchase firms is calculated assuming an equal-weighted investment strategy. Multi-year portfolio returns are computed by compounding the portfolio annual returns across event time. This procedure implicitly assumes annual rebalancing and reduces the possibility of any firm dominating the portfolio in later years. 16 Therefore, it also mitigates the concern regarding the skewness problem in long-run returns. B. Benchmarks - Matching firm approach In this paper, we estimate abnormal stock performance and abnormal trading activity. For both of these attributes, we employ the control-firm approach largely motivated by Barber and Lyon (1997a). 15 In this paper, we focus on long-horizon returns. However, we also extensively analyzed the initial, short-horizon market reaction. The results did not exhibit any noticeable patterns. In order to save space, we do not report these numbers here, but instead incorporate the initial market reaction in the year +1 return. 16 If a firm in the portfolio is delisted in the middle of a year, the return calculation stops on the delisting date and this partial BHR is included in the portfolio return for that particular event year. When moving to the next year, any 18

21 Several studies find that market-cap and the book-to-market ratio (B/M) are two important factors that explain cross-sectional stock returns during our sample period (e.g., Fama and French (1992, 1993, 1996), Lakonishok, Shleifer, and Vishny (1994), and Barber and Lyon (1997b)). Moreover, these same factors are associated with insider trading behavior. For example, insiders in small firms tend to trade less frequently, but tilt more toward purchasing stocks, while insiders in larger firms trade more frequently and tilt their trades more toward selling stocks (Lakonishok and Lee (2001) and Seyhun (1986)). Similarly, insider buying in high B/M firms is significantly stronger than that in low B/M firms (Rozeff and Zaman (1998)). Thus, market-cap and B/M seem particularly important to control for in this study. For each sample firm, we identify a portfolio of five control firms. These are selected by choosing non-repurchasing firms with the closest B/M ratios relative to the repurchase firm and which also belong to the same size decile and trade on the same exchange. If this process produces fewer than five matching firms, the exchange requirement is discarded. 17 Although Barber and Lyon (1997a) recommend a single matching firm method to detect long-run abnormal returns, we use five firms to reduce the noise that may occur when examining small sub-samples. 18 To handle the impact of potential skewness in measuring long-run abnormal returns, all statistical inferences are done using an empirical simulation or bootstrap method, which is more clearly described in the next section. Equally-weighted portfolio returns using these five matching firms are then used to form a benchmark for measuring abnormal BHRs for each repurchase firm. 19 proceeds obtained from the delisted company are implicitly recovered, and the portfolio is rebalanced accordingly among surviving firms. 17 In 5,508 announcements, only 87 have less than five matching firms when the exchange requirement is imposed. 18 The motivation of using the single control-firm is to reduce the impact of positive skewness on point estimates of long-horizon abnormal performance. However, when looking at smaller sub-samples, a single control firm introduces opportunity for measurement error and thus reduces power. In our study, this is a serious concern since data limitations lead us at times to look at small sub-samples. Thus, we make the trade-off to gain additional power and use five control firms. 19 For each repurchasing firm, we calculate annual returns for corresponding control firms over the same holding period. If a repurchasing firm is deleted from CRSP before its four-year anniversary, the return computation of the corresponding matching firms is truncated on the corresponding delisting date. However, if a matching firm has missing returns or is itself delisted, returns from the CRSP value-weighted index are spliced in for the missing period so that a complete BHR return can be calculated. 19

22 C. Significance tests We use an empirical simulation method or bootstrap, for statistical test of long-horizon abnormal returns. 20 This bootstrap method avoids potential bias caused by skewness in long-horizon returns (Kothari and Warner (1997)). Lyon, Barber, and Tsai (1999) also show that tests that use empirical simulation seem to have improved power over other methods. For the entire sample and for each sub-sample, we obtain the empirical null distribution using the following procedure. In each month, we sort all NYSE and Amex common stocks available on both the CRSP and Compustat databases into size deciles. Within each size decile, we define B/M quintile cut-off points. 21 We then classify all stocks common to both CRSP and Compustat, including Nasdaq firms, into one of these 50 size and B/M portfolios. Each firm in the repurchase sample is replaced with a new firm randomly chosen from the set of all firms with the same size and B/M ranking in the month prior to the repurchase announcement. 22 The resulting portfolio thus contains a random collection of firms matched to the repurchase portfolio in time with similar size and B/M characteristics, but is not conditioned on any information. We then calculate BHRs for this pseudo portfolio using the same procedures described above. This provides us with one estimate of abnormal performance from a randomly formed portfolio that looks comparable to our sample portfolio. This process is repeated such that 10,000 pseudo portfolios are obtained, thus yielding 10,000 observations of random abnormal performance. For statistical inferencing, we obtain p-values by comparing the realized abnormal return for repurchasing firms to the empirical distribution of abnormal returns and counting what fraction of the distribution of abnormal returns is greater than that of the test value. 20 Similar approaches have been used by Brock, Lakonishok, and LeBaron (1992), Ikenberry, Lakonishok, and Vermaelen (1995), Ikenberry, Rankine, and Stice (1996), Lee (1997), Lee and Loughran (1998), and Rau and Vermaelen (1998). 21 We use this dependent sorting procedure to reduce the correlation between size and B/M, an approach in several papers including Jegadeesh (1992) who formed size- and beta-portfolios. Here, B/M is calculated as the ratio of the book value of equity from the previous fiscal year-end to the market value of equity from the previous month. To avoid a look-ahead bias (Banz and Breen (1986)) we assume a four-month reporting lag when determining the appropriate book-equity value. 22 Our sample firms and their corresponding matching firms are not included in the list of potential random replacement candidates until four years after repurchasing announcements. 20

23 References Asquith, Paul, and David, W. Mullins, 1986, Signaling with dividends, stock repurchases and equity issues, Financial Management 15, Banz, Rolf W. and William J. Breen, 1986, Sample dependent results using accounting and market data: Some evidence, Journal of Finance 41, Barber, Brad M., and John D. Lyon, 1997a, Detecting long-run abnormal stock returns: the empirical power and specification of test statistics, Journal of Financial Economics 43, Barber, Brad M., and John D. Lyon, 1997b, Firm size, book-to-market ratio, and security returns: A holdout sample of financial firms, Journal of Finance 52, Bettis, J. Carr, Jeffrey L. Coles, and Michael L. Lemmon, 2000, Corporate policies restricting trading by insiders, Journal of Financial Economics 57, Brock, William, Josef Lakonishok, and Blake LeBaron, 1992, Simple technical trading rules and the stochastic properties of stock returns, Journal of Finance, 47, Chan, Konan, David Ikenberry, and Inmoo Lee, 2003, Economic sources of gain in stock repurchases, Journal of Financial and Quantitative Analysis, forthcoming. Comment, Robert, and Gregg A. Jarrell, 1991, The relative signaling power of Dutch-auction and fixedprice self-tender offers and open-market share purchases, Journal of Finance 46, Conard, Jennifer, and Gautam Kaul, 1993, Long-term market overreaction or biases in computed returns, Journal of Finance 48, Dann, Larry Y., 1981, Common stock repurchases: an analysis of returns to bondholders and stockholders, Journal of Financial Economics 9, Fama, Eugene F., 1998, Market efficiency, long-term returns, and behavioral finance, Journal of Financial Economics 49, Fama, Eugene F., and Kenneth R. French, 1992, The cross-section of expected returns, Journal of Finance 47, Fama, Eugene F., and Kenneth R. French, 1993, Common risk factors in the returns on stocks and bonds, Journal of Financial Economics 33, Fama, Eugene F., and Kenneth R. French, 1996, Multifactor explanations of asset pricing anomalies, Journal of Finance 51, Fenn, George W., and Nellie Liang, 2001, Corporate payout policy and managerial stock incentives, Journal of Financial Economics 60, Ikenberry, David, Josef Lakonishok, and Theo Vermaelen, 1995, Market underreaction to open market share repurchases, Journal of Financial Economics 39,

24 Ikenberry, David, Josef Lakonishok, and Theo Vermaelen, 2000, Open market stock repurchases: The Canadian experience, Journal of Finance 55, Ikenberry, David, Graeme Rankine, and Earl Stice, 1996, What do stock splits really signal? Journal of Financial and Quantitative Analysis, 31, Ikenberry, David, and Theo Vermaelen, 1996, The option to repurchase stock, Financial Management 25, Institutional Investor 32, no. 7, July 1998, CFO Forum: The buyback track, p. 30. Jaffe, Jeffrey F., 1974, Special information and insider trading, Journal of Business 47, Jegadeesh, Narasimhan, 1992, Does market risk really explain the size effect? Journal of Financial and Quantitative Analysis 27, Jagannathan, Murali, Clifford Stephens, and Michael Weisbach, 2000, Financial flexibility and the choice between dividends and stock repurchases, Journal of Financial Economics 57, Kothari, S.P., and Jerold B. Warner, 1997, Measuring long-horizon security price performance, Journal of Financial Economics, 43, Lakonishok, Josef, and Inmoo Lee, 2001, Are insiders trades informative?, Review of Financial Studies 14, Lakonishok, Josef, Andrei Shleifer, and Robert W. Vishny, 1994, Contrarian investment, extrapolation, and risk, Journal of Finance 49, Lee, Inmoo, 1997, Do firms knowingly sell overvalued equity? Journal of Finance 52, Lee, Inmoo, and Tim Loughran, 1998, Performance following convertible bond issuance, Journal of Corporate Finance 4, Lee, D. Scott, Wayne H. Mikkelson, and M. Megan Partch, 1992, Manager s trading around stock repurchases, Journal of Finance 47, Loughran, Tim, and Jay R. Ritter, 1996, Long-term market overreaction: The effect of low-priced stocks, Journal of Finance 51, Lyon, John D., Brad M. Barber, and Chih-Ling Tsai, 1999, Improved methods for test of long-run abnormal stock returns, Journal of Finance 54, Ofek, Eli and David Yermack, 2000, Taking stock: Equity-based compensation and the evolution of managerial ownership, Journal of Finance 55, Raad, Elias, and H.K. Wu, 1995, Insider trading effects on stock returns around open-market stock repurchase announcements: an empirical study, Journal of Financial Research 18, Rau, P. Raghavendra, and Theo Vermaelen, 1998, Glamour, value and post-acquisition performance of acquiring firms, Journal of Financial Economics 49,

25 Rozeff, Michael, and Mir Zaman, 1988, Market efficiency and insider trading: New evidence, Journal of Business 61, Rozeff, Michael, and Mir Zaman, 1998, Overreaction and insider trading: Evidence from growth and value portfolios, Journal of Finance 53, Schultz, Paul 2003, Pseudo market timing and the long-run underperformance of IPOs, Journal of Finance 58, Seyhun, Nejat, 1986, Insiders' profits, costs of trading, and market efficiency, Journal of Financial Economics 16, Seyhun, Nejat, 1988, The information content of insider trading, Journal of Business 61, Stephens, Clifford P., and Michael S. Weisbach, 1998, Actual share reacquisition in open-market repurchase programs, Journal of Finance, 53, Vermaelen, Theo, 1981, Common stock repurchases and market signaling, Journal of Financial Economics 9, Weisbenner, Scott J., 2000, Corporate share repurchases in the 1990s: What role do stock options play? University of Illinois at Urbana-Champaign, working paper. 23

26 Table I Summary Statistics by Insider Trading Group This table reports summary information regarding sample repurchase firms. The sample includes all share repurchase announcements reported in the Wall Street Journal from 1980 to 1990 except the fourth quarter of 1987 and those included in the Securities Data Corporation's share repurchase data from 1980 to 1996, with available CRSP daily returns, book-to-market (B/M) ratios. PP, PS, and MT represent repurchase firms with pure insider purchases, pure insider sale, and firms with mixed trades, respectively, during the one-year period after the announcement date. Insider transactions are limited to those that occurred during the one-year period following the announcement. Size of trade is the percentage of shares traded by insiders during the year following the announcement relative to total outstanding shares at the end of the month prior to the announcement. Dollar value of insider trading is expressed as thousands of dollars and adjusted to the 1997 purchasing power using US consumer price indices. P represents insider purchases (including purchases through the exercise of options that were not sold within six months). S stands for insider sales that are not related to the exercises of options within the past six months. The Size decile (1 is the smallest) is based on the market value at month-end prior to the announcement. The B/M quintile (1 is the lowest) is based on the ratio of the book value of equity at the previous fiscal year-end to the market value of equity at month-end prior to the announcement. The Prior One Year Return for repurchase firms is the buy-and-hold return from 252 days before (or the listing date) up to the day before the announcement. Each repurchase firm has five matching control firms, matched based on size, B/M and exchange. The null hypothesis of t-test is that the mean of prior one-year abnormal return is equal to zero. p-values are from the Wilcoxon sign test for the equality of medians. % of Shares Announced is the percentage of announced repurchase shares relative to total outstanding shares at the month end prior to the announcement. Actual Share Repurchase refers to shares actually repurchased by the company during the one-year period after the repurchase announcement. For this information, firms with missing data are excluded, and the number of firms used in each category is reported in parentheses. Dollar value of actual share repurchase is expressed as thousands of dollars and adjusted to the 1997 purchasing power. % of market-cap is the dollar value expressed as a percentage of market capitalization. PP (n=689) PS (n=380) MT (n=4,439) Mean Median Mean Median Mean Median Insider Trading Number of trades (P) Number of trades (S) Size of trade (P) 0.27% 0.03% 0.09% 0.00% Size of trade (S) 0.67% 0.07% 0.17% 0.00% Dollar value (P) $357 $59 $480 $0 Dollar value (S) $1,974 $184 $1,295 $0 Firm Characteristics Size decile ranking B/M quintile ranking Prior One Year Return(%) Repurchase firms Matching firms Difference t-stat/p-value % of Shares Announced Actual Share Repurchase (n=506) (n=295) (n=3,343) Dollar value % of market-cap

27 Table II Average Insider Transactions Around Share Repurchase Announcements Purchases (Sales) is the mean number of purchase (sales) transactions, including both on the open market and through private transactions, during the corresponding six-month interval. Option Purchase is the mean number of insider purchase transactions through the exercise of options. Option-No Sales is the mean number of purchases through the exercise of options, that are not sold within the next six-months. No-opt Sales is the mean number of insider sales transactions that are not related to the option exercise which occurred in the previous six-months. Sixmonth represents the six-month interval relative to the open-market share repurchase announcement date. REP represents share repurchasing firms and MAT represents the corresponding matching firms. For each sample repurchase firm, there are five control firms matched on the basis of size, B/M and exchange. Low B/M, Mid B/M, and High B/M are composed of the bottom B/M quintile, the next three B/M quintiles, and the top B/M quintile, respectively. ***, **, and * denote significance level of 1%, 5%, and 10% for the t-test for the equality of two averages. Six- Purchase Option Purchase Option-No Sales Sales No-opt Sales month REP MAT REP MAT REP MAT REP MAT REP MAT Panel A: All *** ** *** *** ** *** * *** *** *** *** *** *** *** *** ** ** *** *** *** * *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** 1.04 Panel B: Low B/M ** ** * *** *** ** * * *** ** ** Panel C: Mid B/M * * *** *** * *** *** ** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** ** *** *** *** *** *** *** *** 1.01 Panel D: High B/M * * * * ** * *** * * *** *** * ** * ** ** ** *** *** *** *** *** ***

28 Table III Long-Run Buy-and-Hold Returns Conditioned on Insider Trading Group This table reports buy-and-hold returns (BHRs) in % around the repurchase announcement. For each repurchasing firm, annual BHRs are first calculated by compounding the daily returns for 252 days, or up to the delisting date (whichever is earlier). Portfolio annual returns are then computed assuming an equal weight basis. Long-run returns are compounded, with annual portfolio rebalancing, starting in event year +1. Sample firms are sorted into three groups: PP, PS, and MT which represent firms with pure insider purchases, pure insider sale, and mixed trades, respectively, during the one-year period after the announcement date. n is the number of firms in each category. REP refers to the share repurchasing firms and MAT refers to the matching firms. For each repurchase firm, there are five control firms matched on the basis of size, B/M and exchange. DIFF is the abnormal BHR, the difference between BHRs of repurchasing and corresponding matching firms. Significance tests are calculated via an empirical bootstrap simulation procedure. Low B/M, Mid B/M, and High B/M are composed of the bottom B/M quintile, the next three quintiles, and the top quintile, respectively. Event PP PS MT Year n REP MAT DIFF p-value n REP MAT DIFF p-value n REP MAT DIFF p-value Panel A: All Panel B: Low B/M Panel C: Mid B/M Panel D: High B/M

29 Table IV Abnormal Buy-and-Hold Returns Conditioned on Actual Company Repurchase This table reports compounded return differences (DIFF) in % between repurchasing and matching firms. For each repurchasing firm, annual BHRs are first calculated by compounding the daily returns for 252 days, or up to the delisting date (whichever is earlier). Portfolio annual returns are then computed assuming an equal weight basis. Long-run returns are compounded, with annual portfolio rebalancing, starting in event year +1. For each repurchase firm, there are five control firms matched on the basis of size, B/M and exchange. n is the number of firms in each category. DIFF is the abnormal BHR, the difference between BHRs of repurchasing and corresponding matching firms. Buy refers to those repurchasing firms that repurchased at least some shares during the one-year period after the repurchase announcement. Non-buy refers to those firms that did not repurchase any shares in the year after the repurchase announcement. Firms with missing actual repurchasing information on Compustat are excluded from the analysis here. Low B/M, Mid B/M, and High B/M are composed of the bottom B/M quintile, the next three quintiles, and the top quintile, respectively. Significance tests are calculated via an empirical bootstrap simulation procedure. Buy Non-buy Event Year n DIFF p-value n DIFF p-value Panel A: All Panel B: Low B/M Panel C: Mid B/M Panel D: High B/M

30 Table V Abnormal Buy-and-Hold Returns Conditioned on Insider Trading Group and Actual Company Repurchase This table reports long-run abnormal returns (in %) for sample firms sorted by their insider trading classification and actual buyback activity. PP, PS, and MT represent the firms with pure insider purchases, pure insider sales, and mixed trading, respectively, during the one-year period after the announcement date. Buy refers to those repurchasing firms that repurchased at least some shares during the one-year period after the repurchase announcement. Non-buy are those firms that did not repurchase any shares during the one-year period after the announcement. Firms without available actual repurchasing information on Compustat are excluded from the analysis here. n is the number of firms in each category (left for Buy and right for Non-buy). Low B/M, Mid B/M, and High B/M are composed of the bottom B/M quintile, the next three quintiles, and the top B/M quintile, respectively. ***, **, and * denote significance level of 1%, 5%, and 10% based on the p-values from the empirical bootstrap simulation. Event PP PS MT Year n Buy Non-buy n Buy Non-buy n Buy Non-buy Panel A: All , 68 *** *** , 49 *** , 322 *** *** , , 49 ** , 322 ***5.76 *** , , 48 *** , 307 ***7.77 *** , , 45 *** , 289 ***15.30 ** , 58 ** , 43 *** , 278 ***23.65 ***15.58 Panel B: Low B/M , 17 *** , 12 ***-26.9 * , 70 *** ** , , 12 *** , 70 ***6.32 * , , 12 *** , 68 *** , 17 * , 11 *** , 66 *** , 17 ** , 9 ***76.09 * , 64 *** Panel C: Mid B/M , 34 ***-11.9 ** , 30 *** *** , 193 ***-9.81 *** , , , 193 ***5.64 *** , , 30 ** , 184 ***7.17 *** , , 29 ** , 170 ***12.41 *** , * , , 164 ***18.97 ***33.69 Panel D: High B/M -1 80, * , , 59 ***-9.97 ** , , * , 59 ** , , , 55 * , , * , 53 *** , , * , 50 ***

31 Table VI Cross-Sectional Regressions of Abnormal Returns This table reports cross-sectional regressions of abnormal returns on various explanatory variables. The dependent variable is either the one- or four-year abnormal return defined as the difference in buy-and-hold returns between a sample firm and its corresponding five matching firms. Size decile (1 being the smallest) is based on the market value of equity at the month-end prior to the repurchase announcement. B/M quintile (1 being the lowest) is based on the ratio of the book equity value at the previous fiscal year-end to total market value at month-end prior to the announcement. % shares announced is the percentage of announced repurchase shares relative to total outstanding shares at month-end prior to the announcement. Prior one-year abnormal return is the one-year (252 days) buy-and-hold return prior to the announcement between the sample firm and its corresponding five matching firms. PP (PS) dummy is 1 if the sample firm has only insider buying (selling) during the one-year period after the announcement date, and 0 otherwise. % actual repurchase represents the percentage of shares that firms bought during the one-year period after the repurchase announcement. High B/M dummy is 1 for top B/M quintile, and 0 elsewhere. Year dummy variables are included, but not reported in this table. Numbers in parentheses are White (1980) heteroskedasticity-adjusted t-statistics. Model Intercept Size decile B/M quintile % shares announced Prior one-year abnormal return PP dummy PS dummy One-year abnormal return Four-year abnormal return (2.84) (2.68) (2.93) (2.78) (-1.57) (-2.13) (-1.81) (-1.22) (0.08) (0.40) (0.08) (0.08) (3.57) (3.92) (3.58) (3.54) (-0.94) (-0.85) (-0.81) (-0.81) (-0.68) (-0.95) (-0.96) (-1.48) (0.98) (1.24) (1.25) (0.99) (2.51) (1.87) (1.88) (2.34) (3.29) (3.29) (3.33) (3.30) (1.51) (1.42) (1.43) (1.48) (-3.28) (-3.29) (-3.29) (-2.18) (-2.16) (-2.13) (0.73) (0.70) (0.73) (-0.20) (-0.13) (-0.17) Log (1+% actual repurchase) (-1.25) (-1.24) (2.61) (2.60) Log (1+% actual repurchase)* High B/M dummy (-0.21) (2.17) 29

32 Figure 1. Proportion of Firms with Net Insider Buying and Net Insider Selling. The sample includes all share repurchase announcements reported in the Wall Street Journal from 1980 to 1990 except the fourth quarter of 1987 and those included in the Securities Data Corporation's share repurchase data from 1980 to 1996, with available CRSP daily returns, book-to-market (B/M) ratios. Each bar represents the percentage of firms with net purchases (or net sales) (i.e., the number of purchase transactions is greater (less) than the number of sales transactions during the six-month interval) among the firms in each category. Six-month represents the six-month interval relative to the open-market share repurchase announcement date. Buy-Rep (Buy-Mat) represents the percentage of net buying firms among repurchasing firms (matching firms). Sell-Rep and Sell-Mat are similarly defined % 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Six-months Sell-Rep Sell-Mat Buy-Rep Buy-Mat 30