Why connected directors earn superior returns? Evidence from director trading
Hafiz Hoque (University of York) and Xicheng Liub
Hafiz Hoque (PhD) serves as an Associate Professor of Finance at the University of York. His current research focuses on the areas of raising finance in the financial markets, the choice of IPO markets, director network, insider trading, buybacks, microfinance etc. His papers have been published in several reputed journals including Journal of Corporate Finance, Journal of Banking and Finance, Journal International Money and Finance, International Review of Financial Analysis, Journal of International Financial Markets, Institutions & Money, Financial Markets, Institutions & Instruments, and European Financial Management. Hafiz Hoque holds a Ph.D. degree in finance from Cass Business School, University of London.
We examine whether connected directors have superior information and hence earn better returns when they trade their own company's shares. We find that directors with network connections who purchase shares earn statistically and economically higher positive returns compared to directors without network connections. We rule out that our results are not driven by information asymmetry and the network is an artifact of directors' abilities. Then we address what information is flowing through networks. We show that connected director purchases and sales shares based on significant customers lagged returns and earnings announcement surprises, connected directors purchase shares before news announcements and before changes in earnings forecasts. We also find that connected directors opportunistic purchases earn better returns.
However, there is limited evidence that connected director sales are associated with more negative returns compared to unconnected director sales. This is probably due to reputational concerns and litigation risks.
This paper provides several policy implications for corporate governance and definition of insider information.