Information disclosure and insider trading around board meetings Seil Kim UIUC Symposium 2017
Leaking boards Director of Goldman Sachs Non-executive Chair of Dean Foods Rajat Gupta Tom Davis 2
Information transfer around board meetings CEO Investors Board of Directors 3
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 4
Limited disclosure requirements Mandated disclosures in the U.S. ― # of meetings in a year ― Names of directors with less than 75% attendance rate 5
Novel dataset of board meetings Board meeting schedules specified in by-laws 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) ― Publicly available ahead of actual meetings ― Not well known; no prior study or documentation about such disclosure 6
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 7
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 8
Sample firm characteristics 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 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 9
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 Day of the week Percent January 10.24 Monday 6.97 February 8.65 Tuesday 43.07 March 7.07 Wednesday 15.74 April 8.70 Thursday 24.40 May 8.24 Friday 9.82 June 6.94 July 10.72 August 7.79 September 7.35 October 10.06 November 7.20 December 7.04 10
News disclosure Pr (Disclosure) Scheduled board meeting date Capital IQ Key Developments 20% Dividends/Buybacks; Officer/Director appointments; Earnings; 15% Impairments 10% 5% 0% -10 -8 -6 -4 -2 0 2 4 6 8 10 11
News disclosure (1) (2) (3) (4) # of news # of news (1) ÷ 3,088 (1) ÷ (3) Type of news on [0,+1] after BM all periods 1,024 33.16 2,305 44.43 Dividend 544 17.62 2,679 20.31 Earnings Announcements 290 9.39 2,397 12.10 Officer/Director Appointment 217 7.03 2,637 8.23 Debt/Equity Offering 183 5.93 2,507 7.30 M&A 152 4.92 892 17.04 Buyback 137 4.44 1,754 7.81 Business Change 118 3.82 1,095 10.78 Guidance 100 3.24 999 10.01 Product 71 2.30 804 8.83 Legal/Regulation 58 1.88 922 6.29 Client 39 1.26 479 8.14 Annual Meeting 39 1.26 192 20.31 Impairment 30 0.97 255 11.76 Sales 28 0.91 227 12.33 Bylaw 22 0.71 150 14.67 Private Placement 21 0.68 415 5.06 Other 15 0.49 223 6.73 Labor All 3,088 100.00 20,932 14.75 12
Market reaction Board meetings and subsequent news announcements are predictable, but investors are surprised by news nonetheless [-3, 0] [0, +3] t-stat 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 Realized volatility : daily standard deviation of 5-minute returns Implied volatility : mean of call and put 30-day standardized option implied volatility 13
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 = β 0 + β 1 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) 14
Returns to insider trading Panel A: Only trades by outside directors 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 R 2 0.012 0.040 0.001 0.031 obs. 5,403 5,403 2,598 2,598 15
Returns to insider trading Panel B: Comparison of trades by outside and inside directors 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 R 2 0.010 0.042 0.003 0.012 obs. 6,385 6,385 4,153 4,153 16
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) 17
Decomposing returns to insider trading 1 st Earnings Announcement 2 nd Earnings Announcement Board Meeting Trade T+180 days 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* 18
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 other dates within [−63, +63] (to limit misclassification) 19
External validity 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 R 2 0.001 0.030 0.000 0.016 obs. 42,431 42,431 43,840 43,840 20
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