What Do Independent Directors Know? Evidence from Their Trading

Enrichetta Ravina, Paola Sapienza

NBER Working Paper No. 12765
Issued in December 2006
NBER Program(s):   CF

We compare the trading performance of independent directors and other officers of the firm. We find that independent directors earn positive and substantial abnormal returns when they purchase their company stock, and that the difference with the same firm's officers is relatively small at most horizons. The results are robust to controlling for firm fixed effects and to using a variety of alternative specifications. Executive officers and independent directors make higher returns in firms with weaker governance and the gap between these two groups widens in such firms. Independent directors who sit in audit committees earn higher return than other independent directors at the same firm. Finally, independent directors earn significantly higher returns than the market when they sell the company stock in a window before bad news and around a restatement announcement.

(732 K)

Published:

• “What Do Independent Directors Know? Evidence from Their Trading,” with Enrichetta Ravina, forthcoming, The Review of Financial Studies, Volume 23, Number 3. March 2010. p. 962-1003 ,
• What Do Independent Directors Know? Evidence from Their Trading, Enrichetta Ravina, Paola Sapienza, in Corporate Governance, The Review of Financial Studies, vol. 23, no. 3, March 2010
  

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