Studies of UK Director Trading: In Aggregate and by Director Role
Thesis or dissertation
University of Exeter
The topic of insider/director trading raises interesting questions and has generated much attention from researchers, market participants and regulators. The purpose of this thesis is to investigate the long-run director trading performance in the UK market. It examines relationship between aggregate director trading and indicators of the UK macroeconomy focus on the macro-aspects in Chapter 4 and 5. The extant empirical literature on aggregate director trading can be categorized into two parts: the first is the relationship between director trading and the stock market; and the second is the link between stock returns and future aggregate economic activities. Having examined the macro-picture, it goes to examine a more micro-picture. Chapter 6 examines long-run relationship between director trading and market reactions. This thesis is organized around three research studies which are presented in Chapters 4, 5 and 6 and which examine long-run director trading activities in the UK. Chapters 4 and 5 together investigate the evidence for director trading activities and the macroeconomy. There is little literature on aggregate director trading and the macro-economy: therefore Chapter 4 examines the relationship between aggregate director trading and future market excess returns. Empirical evidence is presented which demonstrates that the returns on stock market are significantly correlated to future economic growth. Chapter 5 then examines whether the forecasting ability can be improved by adding aggregate director trading as a measurement of business confidence into the forecasting model. Chapter 6 examines the long-run performance of market reaction to director roles. In order to examine the relationship between aggregate director trading and the macro-economy, the link between aggregate director trading and future market excess returns is investigated. This thesis considers the importance of the seasonality issue in UK director trading and employs a number of alternative seasonality adjustments to adjust the raw data on aggregate director trading. The positive correlation between aggregate director trading and future market excess returns is confirmed and evidence is provided that indicates directors are contrarian: in aggregate they purchase (sell) their own-company stock prior to general stock market increases (decreases). In the long-run, the empirical work demonstrates that aggregate director trading has forecasting power in terms of predicting future stock market excess returns. Additional findings are that aggregate director trading in large firms has a positive significant predictive ability for identifying future excess returns of large firms and aggregate director trading of some industries has positive significant forecasting ability for future excess returns of these industries. Having confirmed the relationship between aggregate director trading and future market movement, this thesis turns to examine the link between aggregate director trading and future UK economic growth. It measures economic growth of future real economic activity by the change in gross domestic product (GDP) and it documents a strong correlation between past aggregate director trading and future real economic activity. The predictability of future economic growth increases with both the length of forecasting horizon and past net number of director trading. In a multivariate regression analysis this thesis finds that aggregate director trading retains predicting power with respect to future GDP growth even after including popular business cycle variables (dividend yield of FTSE All share, growth rate of industrial production and term spread) as explanatory variables. This finding suggests that aggregate director trading captures things related to changes in real activity but not captured by market factors (Fama-French 3 factors: SMB, HML and RMRF) and business cycle variables. After examining the relationship between aggregate director trading, market returns and changes in GDP, the last empirical Chapter of the thesis concentrates director trading on the micro-aspects of director trading and stock movement. It examines the stock market reaction to director trading with firm characteristics and the effects of director trading pattern. Using long-run calendar-time abnormal returns (CTAR) methodology with Fama-French 3-factor model, evidence is presented that directors do have more valuable information allowing them to make significant abnormal returns than other market participants, the performance of CFOs supports the information hierarchy hypothesis in 1- and 6-month post-purchase trading time, and the director trading with firm characteristics has a significant effect on stock abnormal returns.
PhD in Finance