Directors' share dealings and long run company performance

Abstract

The primary aim of this study is to examine if the market prices the information contained in directors' trades in their own firms. The second aim is to examine the association between directors' trades and the future performance of the firm. We find evidence of a significant share price reaction to the announcement of both directors' sales and purchases, although the former is larger. Evidence of a persistent post announcement "drift" suggests that the market's reaction to directors' trades is not always immediate. There is evidence that directors wait for a price rise before selling (or a fall before purchasing). We find evidence of a relationship between directors' sales and the performance of the firm, particularly in the longer term, but no relationship for purchases. This contradicts much of the previous research in the United States but is consistent with Australian evidence. The relationship is stronger and more significant for larger trades, smaller firms and trades complaint with s235 of the Corporations Law. The relationship also differs across industries. Our findings suggest that directors' trades are a signal about the long-term performance of the firm. The evidence suggests that the significance of insider trading in Australia should not be underestimated.