Information disclosure and insider trading around board meetings - - PowerPoint PPT Presentation

Information disclosure and insider trading around board meetings

Seil Kim

UIUC Symposium 2017

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Leaking boards

Non-executive Chair of Dean Foods Tom Davis Director of Goldman Sachs Rajat Gupta

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Information transfer around board meetings

Board of Directors Investors CEO

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Why are board meetings important?

• Public information transfer: Firm → Investors

― Important decisions require full board approval, sometimes by law ― Certain decisions are disclosed immediately (e.g., dividends) ― Board meetings are a precursor to important news disclosure

• Private information transfer: CEO → Board

― Directors receive board meeting agenda in advance of regular board meetings ― Not all board decisions are publicly disclosed ― Outside director trades before board meetings are profitable

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Limited disclosure requirements

• Mandated disclosures in the U.S.

― # of meetings in a year ― Names of directors with less than 75% attendance rate

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Novel dataset of board meetings

Section 2.04. Regular Meetings. The Board shall hold a regular meeting without notice at the principal office of the Corporation on the third Tuesday in each month, with such exceptions as shall be determined by the Board …

JP Morgan Chase By-laws (March 18, 1997)

• Board meeting schedules specified in by-laws

― Publicly available ahead of actual meetings ― Not well known; no prior study or documentation about such disclosure

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Data collection

• Lexis-Nexis keyword search of by-laws from SEC filings

― “Monday”, “by-law”, “board”, “regular meeting”, and “director”

• 185 firms with board meeting schedules specified in by-laws
• 117 unique firms (1,016 firm-years) covered in Compustat/CRSP during

1996-2013

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Sample firm characteristics

• Comparable to S&P 1500 in size
• Overweight on banks/utilities and dividend payers
• Still, self-selection concerns are mitigated because:

― Sticky disclosure: by-laws are seldom amended ― Not easily visible; unlikely to be a signal ― External validity tests using dividend declaration dates of firms without specified meeting schedules

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Sample firm characteristics

Sample (1,016 firm-years) S&P 1500 (26,642 firm-years) Mean Median

• St. Dev.

Mean Median

• St. Dev.

Financials Total Assets 35,841.93 2,161.06 199,708.05 16,065.13 2,030.64 87,502.58 Sales 6,613.54 785.28 23,069.23 6,071.50 1,454.25 18,257.83 Market Cap 6,751.32 1,070.29 19,814.81 8,330.44 1,803.36 25,397.72 Book-to-Market 0.58 0.51 1.50 0.54 0.46 0.59 Board-related Board Size 10.77 11.00 3.03 9.66 9.00 5.09 Board Meetings 8.27 8.00 3.28 7.39 7.00 3.27 Fama French 12 Industries Sample (1,016 firm-years) S&P 1500 (26,642 firm-years) Consumer non-durables 5.81 6.46 Consumer durables 2.66 2.93 Manufacturing 10.33 13.24 Oil, gas, and coal 3.35 4.27 Chemicals and allied products 0.49 3.08 Business equipment 4.53 15.76 Telephone and television transmission 1.38 1.78 Utilities 11.32 5.40 Wholesale, retail, and some services 5.41 12.29 Healthcare, medical equipment, and drugs 3.44 7.18 Finance 45.18 16.23 Other 6.10 11.37

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Board meeting frequency

Mean Std p1 p25 p50 p75 p99 Scheduled meetings 6.38 3.60 1.00 4.00 4.00 12.00 12.00 Actual meetings 8.27 3.30 4.00 6.00 8.00 11.00 18.00

• Diff. Actual - Scheduled

1.89 3.68 −7.00 0.00 1.00 4.00 12.00

Month Percent January 10.24 February 8.65 March 7.07 April 8.70 May 8.24 June 6.94 July 10.72 August 7.79 September 7.35 October 10.06 November 7.20 December 7.04 Day of the week Percent Monday 6.97 Tuesday 43.07 Wednesday 15.74 Thursday 24.40 Friday 9.82

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News disclosure

0% 5% 10% 15% 20%

• 10
• 8
• 6
• 4
• 2

2 4 6 8 10 Pr (Disclosure) Capital IQ Key Developments Scheduled board meeting date Dividends/Buybacks; Officer/Director appointments; Earnings; Impairments

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News disclosure

(1) (2) (3) (4) Type of news on [0,+1] # of news after BM (1) ÷ 3,088 # of news all periods (1) ÷ (3) Dividend 1,024 33.16 2,305 44.43 Earnings Announcements 544 17.62 2,679 20.31 Officer/Director Appointment 290 9.39 2,397 12.10 Debt/Equity Offering 217 7.03 2,637 8.23 M&A 183 5.93 2,507 7.30 Buyback 152 4.92 892 17.04 Business Change 137 4.44 1,754 7.81 Guidance 118 3.82 1,095 10.78 Product 100 3.24 999 10.01 Legal/Regulation 71 2.30 804 8.83 Client 58 1.88 922 6.29 Annual Meeting 39 1.26 479 8.14 Impairment 39 1.26 192 20.31 Sales 30 0.97 255 11.76 Bylaw 28 0.91 227 12.33 Private Placement 22 0.71 150 14.67 Other 21 0.68 415 5.06 Labor 15 0.49 223 6.73 All 3,088 100.00 20,932 14.75

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Market reaction

Realized volatility: daily standard deviation of 5-minute returns Implied volatility: mean of call and put 30-day standardized option implied volatility [-3, 0] t-stat [0, +3] t-stat Excluding earnings announcements Realized volatility 0.012* 1.77

• 0.021***
• 3.31

Implied volatility

• 0.001
• 0.76
• 0.002
• 1.27
• Board meetings and subsequent news announcements are predictable,

but investors are surprised by news nonetheless

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Returns to insider trading

Compare the transaction profits of outsider directors’ transactions when they are more likely informed (before the board meeting) to other periods: Abnormal Return = β0 + β1 Board Meeting + β’ Controls + e

Abnormal Return: 180-day four-factor alpha and 180-day buy-and-hold return (short-swing profit rule); multiply (−1) for sales transactions Board Meeting: 1 if transaction is made in [−3,0] of the board meeting date Controls: transaction size, firm size, firm book-to-market (in robustness tests, firm fixed effects)

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Returns to insider trading

180-day four-factor alpha Purchases Sales Intercept 0.021** −0.017 0.009 0.059 [2.35] [−0.40] [1.31] [1.26] Board Meeting 0.051*** 0.035*** 0.017 0.015 [3.53] [3.43] [1.12] [1.03] Log(Trade Value) 0.004 0.006** [1.24] [2.35] Log(Firm Size) −0.004 −0.014*** [−0.83] [−3.62] Book-to-Market 0.055*** −0.033 [3.54] [−1.59] Adjusted R2 0.012 0.040 0.001 0.031

• bs.

5,403 5,403 2,598 2,598 Panel A: Only trades by outside directors

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Returns to insider trading

180-day four-factor alpha Purchases Sales Intercept 0.031*** −0.017 −0.005 0.021 [2.90] [−0.48] [−0.51] [0.54] Outside Director −0.009 −0.007 0.014 0.015 [−0.93] [−0.73] [1.34] [1.42] Board Meeting −0.035 −0.025 0.011 0.009 [−1.24] [−0.96] [0.66] [0.58] Outside Director 0.085*** 0.060** 0.006 0.006 × Board Meeting [3.17] [2.32] [0.24] [0.25] Log(Trade Value) 0.005* 0.003 [1.87] [1.40] Log(Firm Size) −0.005 −0.008** [−1.13] [−2.41] Book-to-Market 0.053*** −0.003 [3.42] [−0.14] Adjusted R2 0.010 0.042 0.003 0.012

• bs.

6,385 6,385 4,153 4,153 Panel B: Comparison of trades by outside and inside directors

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Decomposing returns to insider trading

• Abnormal returns are not attributable to short-term stock returns

around the board meeting date

― Trading a few days after the board meeting would yield similar profits ― 60-day alpha (1.2%) < 90-day alpha (2.3%) < 180-day alpha (3.5%)

• Decisions made in board meetings may be:

― Disclosed immediately following a board meeting (e.g., dividends) ― Disclosed after it materializes (e.g., a decision to initiate merger discussions) ― Never explicitly disclosed but realized over a longer horizon (e.g., investments)

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180-day return EAD return Excluding EAD 180-day four-factor alpha During [−3,0] of board meeting 0.067*** 0.014*** 0.052*** Outside of [−3,0] of board meeting 0.023** 0.005 0.017* Trade T+180 days Board Meeting 1st Earnings Announcement 2nd Earnings Announcement

Decomposing returns to insider trading

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External validity

• Dividend declaration dates are a publicly available subset of board

meetings

― Naturally, some firms’ dividend dates follow a predictable schedule (Kalay and

Loewenstein 1986; Graham et al. 2006)

― 2,839 firms and 21,449 dividend declaration dates

• News disclosure tests:

― Frequency of non-dividend news jumps on divided declaration dates

• Insider trading tests:

― Compare returns to trading on [−3, 0] of dividend declaration dates to those in

• ther dates within [−63, +63] (to limit misclassification)

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180-day four-factor alpha Purchases Sales Intercept 0.058*** 0.089*** −0.026*** −0.028 [14.87] [6.45] [−6.14] [−1.43] Outside Director −0.012*** −0.008* 0.002 0.000 [−2.74] [−1.78] [0.51] [0.03] Board Meeting −0.010 −0.006 0.012 0.011 [−1.10] [−0.64] [1.45] [1.32] Outside Director 0.021** 0.021** −0.015 −0.013 × Board Meeting [2.09] [1.98] [−1.54] [−1.33] Log(Trade Value) 0.002** −0.007*** [2.30] [−5.70] Log(Firm Size) −0.013*** 0.014*** [−8.01] [7.60] Book-to-Market 0.018*** 0.003 [3.50] [0.35] Adjusted R2 0.001 0.030 0.000 0.016

• bs.

42,431 42,431 43,840 43,840

External validity

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Contributions

• Regular board meetings are a precursor to disclosure

― Timing of news can be predicted even if the nature of the news is not ― Announcement is “delayed” until a board meeting

$0 $2 $4 $6 2000/09/01 2000/09/22 2000/10/12 2000/11/01 2000/11/21

10/24 (Prescheduled meeting date): Announces CEO death & new director appointment 9/10: CEO dies of a heart attack No announcement

Badger Paper Mills (BPMI) share price and news events

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Contributions

• Board meetings provide a trading opportunity for outside directors

― Add to Ravina and Sapienza (2010) and Franco, Ittner, and Urcan (2017) by pinpointing when independent directors’ trades are informative ― Possibly due to limited scrutiny; identifying board meeting dates are difficult

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Date Proposal Outcome Names of independent directors Gyeong- Hoon Boo Jae- Seung Yoon Hyun- Soon Do Jan 12, 2012 1. Acquisition of Fever Studio Co., Ltd.

• Deal terms: 50,000 shares (100%)

Deferred Defer Absent Defer Jan 31, 2012 1. Acquisition of Fever Studio Co., Ltd.

• Deal terms: 37,500 shares (75%)

Rejected Absent Against Against Feb 8, 2012

• 1. Approval of FY 2011 financial

statements Approved For For For

• 2. Convene annual shareholder meeting

for FY 2011 Approved For For For Excerpt from Naver Corp. proxy statement (March 14, 2013)

Disclosure of board meeting agenda and director votes