Double Signals or Single Signal? An Investigation of Insider Trading around Share Repurchases
Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 22/2008
Journal of International Financial Markets, Institutions and Money Volume 20, Issue 4, October 2010, Pages 376-388
28 Pages Posted: 21 Feb 2009 Last revised: 6 Sep 2022
Date Written: November 30, 2008
Abstract
This working paper was written by Michael Firth (Lingnan University of Hong Kong), T. Y. Leung (City University of Hong Kong) and Oliver M. Rui (The Chinese University of Hong Kong).
This study examines directors' dealing activity around share repurchasing periods in Hong Kong. There are significant insider trading activities before the share repurchasing period. Consistent with the signaling hypothesis, the directors' purchase activities during the share repurchase period are significantly higher than the expected level while the directors' sale activities are abnormally lower than the expected level. Double signals of share repurchases and directors' purchases create a stronger signal in conveying undervaluation. However, insider sales around share repurchase discounts the undervaluation signal. This study provides some evidence that information signaling is a dominating factor driving the share repurchase decision.
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