What Do Independent Directors Know? Evidence from Their Trading
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.
We would like to thank Yakov Amihud, Patrick Bolton, Menachem Brenner, Eliezer Fich, Ilan Guedj, Kose John, Patricia Ledesma, Debbie Lucas, Randall Morck, Holger Mueller, Bernt Odegaard, Matthew Richardson, Ioanid Rosu, Carola Schenone, Geoffrey Tate, Michael Weisbach, David Yermack, seminar participants at Columbia University, the Federal Reserve Bank of New York, Georgetown University, New York University, Northwestern University, and participants at the 2006 WFA Annual Meeting, the 2006 North American Summer Meeting of the Econometric Society, the 2006 SED Annual Meeting, and the Olin Washington University 3rd Annual Conference on Corporate Finance for their comments. We also thank Eliezer Fich for sharing his board size data with us. All remaining errors are our own. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
“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 citation courtesy of
What Do Independent Directors Know? Evidence from Their Trading, Enrichetta Ravina, Paola Sapienza. in Corporate Governance, Weisbach. 2010