Hostname: page-component-8448b6f56d-sxzjt Total loading time: 0 Render date: 2024-04-18T10:04:41.763Z Has data issue: false hasContentIssue false
  • English
  • Français

Are CFOs’ Trades More Informative Than CEOs’ Trades?

Published online by Cambridge University Press:  19 April 2012

Weimin Wang ,
Yong-Chul Shin  and
Bill B. Francis
Weimin Wang
Affiliation:
wwang4@slu.edu, Cook School of Business, Saint Louis University, 3674 Lindell Blvd, St. Louis, MO 63108
Yong-Chul Shin
Affiliation:
yong-chul.shin@umb.edu, College of Management, University of Massachusetts Boston, 100 Morrissey Blvd, Boston, MA 02125
Bill B. Francis
Affiliation:
francb@rpi.edu, Lally School of Management and Technology, Rensselaer Polytechnic Institute, 110 8th St, Troy, NY 12180
Get access Rights & Permissions [Opens in a new window]

Abstract

We investigate whether trades made by chief financial officers (CFOs) reveal more information about future stock returns than those by chief executive officers (CEOs). We find that CFOs earn statistically and economically higher abnormal returns following their purchases of company shares than CEOs. During 1992–2002, CFOs earned an average 12-month excess return that is 5% higher than that by CEOs. The superior performance by CFOs occurs notwithstanding controls for risk factors and persists even after their trades are publicly disclosed. Further analysis shows that CFO purchases are associated with more positive future earnings surprises than CEO purchases, suggesting that CFOs incorporate better information about future earnings.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 4 , August 2012 , pp. 743 - 762
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Asparouhova, E.; Bessembinder, H.; and Kalcheva, I. “Liquidity Biases in Asset Pricing Tests.” Journal of Financial Economics, 96 (2010a), 215–237.CrossRefGoogle Scholar
Asparouhova, E.; Bessembinder, H.; and Kalcheva, I.“Microstructure Noise and Inference in Cross-Sectional Asset Pricing Tests.” Working Paper, University of Utah (2010b).Google Scholar
Ball, R., and Brown, P. “An Empirical Evaluation of Accounting Income Numbers.” Journal of Accounting Research, 6 (1968), 159–178.CrossRefGoogle Scholar
Beaver, W. H. “The Information Content of Annual Earnings Announcements.” Journal of Accounting Research, 6 (1968), 67–92.CrossRefGoogle Scholar
Beneish, M. D., and Vargus, M. E. “Insider Trading, Earnings Quality, and Accrual Mispricing.” Accounting Review, 77 (2002), 755–791.CrossRefGoogle Scholar
Blume, M. E., and Stambaugh, R. F. “Biases in Computed Returns: An Application to the Size Effect.” Journal of Financial Economics, 12 (1983), 387–404.CrossRefGoogle Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chari, V. V.; Jagannathan, R.; and Ofer, A. R. “Seasonalities in Security Returns: The Case of Earnings Announcements.” Journal of Financial Economics, 21 (1988), 101–121.CrossRefGoogle Scholar
Cohen, D. A.; Dey, A.; Lys, T. Z.; and Sunder, S. V. “Earnings Announcement Premia and the Limits to Arbitrage.” Journal of Accounting and Economics, 43 (2007), 153–180.CrossRefGoogle Scholar
Conrad, J., and Kaul, G. “Long-Term Market Overreaction or Biases in Computed Returns?” Journal of Finance, 48 (1993), 39–63.Google Scholar
Fama, E. F. “Market Efficiency, Long-Term Returns, and Behavioral Finance.” Journal of Financial Economics, 49 (1998), 283–306.CrossRefGoogle Scholar
Fama, E. F., and French, K. R. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 42 (1992), 427–465.Google Scholar
Fama, E. F., and French, K. R. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Finnerty, J. E. “Insiders and Market Efficiency.” Journal of Finance, 31 (1976), 1141–1148.CrossRefGoogle Scholar
Frazzini, A., and Lamont, O. “The Earnings Announcement Premium and Trading Volume.” NBER Working Paper No. W13090 (2007).Google Scholar
Geiger, M. A., and North, D. S. “Does Hiring a New CFO Change Things? An Investigation of Changes in Discretionary Accruals.” Accounting Review, 81 (2006), 781–809.CrossRefGoogle Scholar
Graham, J. R., and Harvey, C. R. “The Theory and Practice of Corporate Finance: Evidence from the Field.” Journal of Financial Economics, 60 (2001), 187–243.CrossRefGoogle Scholar
Hu, J., and Noe, T. H. “Insider Trading and Managerial Incentives.” Journal of Banking and Finance, 25 (2001), 681–716.CrossRefGoogle Scholar
Jaffe, J. F. “Special Information and Insider Trading.” Journal of Business, 47 (1974), 410–428.CrossRefGoogle Scholar
Jeng, L. A.; Metrick, A.; and Zeckhauser, R. “Estimating the Returns to Insider Trading: A Performance-Evaluation Perspective.” Review of Economics and Statistics, 85 (2003), 453–471.CrossRefGoogle Scholar
Jiang, J. X.; Petroni, K. R.; and Wang, I. Y. “CFOs and CEOs: Who Have the Most Influence on Earnings Management?” Journal of Financial Economics, 96 (2010), 513–526.CrossRefGoogle Scholar
Ke, B.; Huddart, S.; and Petroni, K. “What Insiders Know about Future Earnings and How They Use It: Evidence from Insider Trades.” Journal of Accounting and Economics, 35 (2003), 315–346.CrossRefGoogle Scholar
Lakonishok, J., and Lee, I. “Are Insider Trades Informative?” Review of Financial Studies, 14 (2001), 79–111.CrossRefGoogle Scholar
Leland, H.E.”Insider Trading: Should It Be Prohibited?” Journal of Political Economy, 100 (1992), 859–887.CrossRefGoogle Scholar
Lin, J.-C., and Howe, J. S. “Insider Trading in the OTC Market.” Journal of Finance, 45 (1990), 1273–1284.CrossRefGoogle Scholar
Manne, H. “In Defense of Insider Trading.” Harvard Business Review, 44 (1966), 113–122.Google Scholar
Piotroski, J. D., and Roulstone, D. T. “Do Insider Trades Reflect Both Contrarian Beliefs and Superior Knowledge about Future Cash Flow Realizations?” Journal of Accounting and Economics, 39 (2005), 55–81.CrossRefGoogle Scholar
Rozeff, M. S., and Zaman, M. A. “Market Efficiency and Insider Trading: New Evidence.” Journal of Business, 61 (1988), 25–44.CrossRefGoogle Scholar
Seyhun, H. N. “Insiders’ Profits, Costs of Trading, and Market Efficiency.” Journal of Financial Economics, 16 (1986), 189–212.CrossRefGoogle Scholar
Seyhun, H. N. “Why Does Aggregate Insider Trading Predict Future Stock Returns?” Quarterly Journal of Economics, 107 (1992), 1303–1331.CrossRefGoogle Scholar
Seyhun, H. N. Investment Intelligence from Insider Trading. Cambridge, MA: MIT Press (1998).CrossRefGoogle Scholar