Menu Expand

Insider Trading and Fraudulent Share Repurchase

Cite JOURNAL ARTICLE

Style

Wang, D., Li, X., Tang, H., Sun, Y. Insider Trading and Fraudulent Share Repurchase. Credit and Capital Markets – Kredit und Kapital, 55(2), 227-260. https://doi.org/10.3790/ccm.55.2.227
Wang, Du; Li, Xiang; Tang, Hui and Sun, Yicheng "Insider Trading and Fraudulent Share Repurchase" Credit and Capital Markets – Kredit und Kapital 55.2, 2022, 227-260. https://doi.org/10.3790/ccm.55.2.227
Wang, Du/Li, Xiang/Tang, Hui/Sun, Yicheng (2022): Insider Trading and Fraudulent Share Repurchase, in: Credit and Capital Markets – Kredit und Kapital, vol. 55, iss. 2, 227-260, [online] https://doi.org/10.3790/ccm.55.2.227

Format

Insider Trading and Fraudulent Share Repurchase

Wang, Du | Li, Xiang | Tang, Hui | Sun, Yicheng

Credit and Capital Markets – Kredit und Kapital, Vol. 55 (2022), Iss. 2 : pp. 227–260

2 Citations (CrossRef)

Additional Information

Article Details

Author Details

Du Wang, Organization Department of CPC Jinjiang District Committee, Chengdu, China.

Xiang Li, Sichuan Henghexin Law firm, Chengdu, China.

Hu Tang, An Xi (Shanghai) Commercial Management Ltd, China.

Yicheng Sun (corresponding author), Southwestern University of Finance and Economics, Chengdu, China.

Cited By

  1. The Chinese Financial System and China’s Role in the Financial World

    Chen, Carl R. | Tao, Qizhi

    Credit and Capital Markets – Kredit und Kapital, Vol. 55 (2022), Iss. 2 P.149

    https://doi.org/10.3790/ccm.55.2.149 [Citations: 1]
  2. Can Machines Better Predict Insider Trading?

    Elnahas, Ahmed

    SSRN Electronic Journal, Vol. (2024), Iss.

    https://doi.org/10.2139/ssrn.4839465 [Citations: 0]

References

  1. Aboody, D./Hughes, J./Liu, J. (2005): Earnings Quality, Insider Trading, and Cost of Capital, Journal of Accounting Research, Vol. 43, 651–73.  Google Scholar
  2. Agrawal, A./Cooper, T. (2015): Insider trading before accounting scandals, Journal of Corporate Finance, Vol. 34, 169–190.  Google Scholar
  3. Aktas, N./de Bodt, E./Van Oppens, H. (2008): Legal insider trading and market efficiency, Journal of Banking and Finance, Vol. 32(7), 1379–1392.  Google Scholar
  4. Babenko, I./Tserlukevich, Y./Vedrashko, A. (2012): The Credibility of Open Market Share Repurchase Signaling, Journal of Financial and Quantitative Analysis, Vol. 47(5), 1059–88.  Google Scholar
  5. Ball, R./Brown, P. (1968): An Empirical Evaluation of Accounting Income Numbers, Journal of Accounting Research, Vol. 6(2), 159–178.  Google Scholar
  6. Beasley, M. S. (1996): An empirical analysis of the relation between the board of director composition and financial statement fraud, The Accounting Review, Vol. 71(4), 443–465.  Google Scholar
  7. Beneish, M. D. (1999): Incentives and penalties related to earnings overstatements that violate gaap, The Accounting Review, Vol. 74(4), 425–457.  Google Scholar
  8. Beneish, M. (2001): Earnings Management: A Perspective, Managerial Finance, Vol. 27, 3–17.  Google Scholar
  9. Beneish, M./Press, E./Vargus, M. (2005): The Effect of the Threat of Litigation on Insider Trading and Earnings Management, Working Paper (Indiana University).  Google Scholar
  10. Beneish, M./Vargus, M. (2002): Insider Trading, Earnings Quality and Accrual Mispricing, The Accounting Review, Vol. 77, 755–92.  Google Scholar
  11. Betzer, A./Theissen, E. (2009): Insider trading and corporate governance: The case of Germany, European Financial Management, Vol. 15(2), 402–429.  Google Scholar
  12. Bhattacharya, U./Jacobsen, S. E. (2016): The share repurchase announcement puzzle: Theory and evidence, Review of Finance, Vol. 20(2), 725–758.  Google Scholar
  13. Bonaime, A. A./Ryngaert, M. D. (2013): Insider trading and share repurchases: Do insiders and firms trade in the same direction?, Journal of Corporate Finance, Vol. 22, 35–53.  Google Scholar
  14. Boshkoska, M. (2015): The Agency Problem: Measures for Its Overcoming, International Journal of Business and Management, Vol. 10.  Google Scholar
  15. Boubacar, H./Morris, T. (2011): Insider trading in large Canadian banks, International Journal of Economics and Finance, Vol. 3(6).  Google Scholar
  16. Brav, A./Graham, J. R./Harvey, C. R./Michaely, R. (2005): “Payout Policy in the 21st Century,” Journal of Financial Economics, Vol. 77, 483–52777: 483–528.  Google Scholar
  17. Chen, H. C./Harper, J. T./Iyer, S. R. (2018): Economic shock and share repurchases, The North American Journal of Economics and Finance, Vol. 44, 254–264.  Google Scholar
  18. Cheng, Q./Farber, D. B. (2008): Earnings restatements, changes in ceo compensation, and firm performance, The Accounting Review, Vol. 83(5), 1217–1250.  Google Scholar
  19. Cheng, Q./Warfield, T. D. (2004): Equity incentives and earnings management, The Accounting Review, Vol. 80(2), 441–476.  Google Scholar
  20. Choi, D. (1997): Targeted share repurchases, free cash flows, and shareholder wealth: additional evidence, Managerial Finance.  Google Scholar
  21. Comment, R./Jarrell, G. A. (1991): The relative signaling power of Dutch‐auction and fixed‐price self‐tender offers and open‐market share repurchases, The Journal of Finance, Vol. 46(4), 1243–1271.  Google Scholar
  22. Core, J. E./Guay, W. R./Richardson, S. A./Verdi, R. S. (2006): Stock market anomalies: what can we learn from repurchases and insider trading?, Review of Accounting Studies, Vol. 11(1), 49–70.  Google Scholar
  23. Dann, L. Y. (1981): Common stock repurchases: An analysis of returns to bondholders and stockholders, Journal of Financial Economics, Vol. 9(2), 113–138.  Google Scholar
  24. Darrough, M./Rangan, S. (2005): ‘Do Managers Manipulate Earnings When They Sell Their Shares in an Initial Public Offering?’, Journal of Accounting Research, Vol. 43.  Google Scholar
  25. Dechow, P. M./Kothari S./Watts R. (1998): The Relation between Earnings and Cash Flows, Journal of Accounting and Economics, Vol. 25(2), 133–68.  Google Scholar
  26. Dechow, P. M./Sloan, R. G./Sweeney, A. P. (1995): Detecting earnings management, The Accounting Review, 193–225.  Google Scholar
  27. D’Mello, R./Shroff, P. (2000): “Equity Undervaluation and Decisions Related to Repurchase Tender Offers: An Empirical Investigation,” Journal of Finance, Vol. 55, 2399–2424.  Google Scholar
  28. Doukas, J./Travlos, N. G. (1998): The effect of corporate multinationalism on shareholders’ wealth: evidence from international acquisitions, The Journal of Finance, Vol. 43(5), 1161–1175.  Google Scholar
  29. Easley, D./O’Hara, M. (2004): Information and the cost of capital. Journal of Finance, Vol. 59(4), 1553–1583.  Google Scholar
  30. Fried, J. (2005): ‘Informed Trading and False Signaling with Open Market Repurchases’, California Law Review, Vol. 93(5), 1,323–86.  Google Scholar
  31. Gaur, A. S./Malhotra, S./Zhu, P. (2013): Acquisition announcements and stock market valuations of acquiring firms’ rivals: a test of the growth probability hypothesis in China. Strategic Management Journal, Vol. 34(2), 215–232.  Google Scholar
  32. Gubbi, S./Aulakh, P./Pay, S./Sarkar, M./Chittoor, R. (2010): Do international acquisitions by emerging-economy firms create shareholder value: the case of India firms, Journal of International Business Studies, Vol. 41(3), 391–418.  Google Scholar
  33. Haleblian, J./Finkelstein, S. (1999): The influence of organizational acquisition experience on acquisition performance: a behavioral learning perspective, Administrative Science Quarterly, Vol. 44(1), 29–56.  Google Scholar
  34. Hausch, D./Seward, J. (1993): “Signaling with Dividends and Share Repurchases: A Choice between Deterministic and Stochastic Cash Disbursements,” Review of Financial Studies, Vol. 6, 121–154.  Google Scholar
  35. He, J./Tian, X. (2013): The dark side of analyst coverage: the case of innovation, Journal of Financial Economics, Vol. 109(3), 856–878.  Google Scholar
  36. Henry, D. (2004): Why the flurry of buybacks?, Business Week (3910), 116–117.  Google Scholar
  37. Huang, H. W./Rose-Green, E./Lee, C. C. (2012): Ceo age and financial reporting quality, Accounting Horizons, Vol. 26(4), 725–740.  Google Scholar
  38. Issaevitch, T. A. (2008): Insider trading and earnings management, Dissertations and Theses – Gradworks.  Google Scholar
  39. Jaffe, J. F. (1974): Special information and insider trading, Journal of Business, Vol. 47(3), 410-428. doi:10.1086/295655.  Google Scholar
  40. Jones, J. J. (1991): Earnings management during import relief investigations, Journal of Accounting Research, Vol. 29(2), 193–228.  Google Scholar
  41. Karpoff, J. M. (1986): A theory of trading volume, Journal of Finance, Vol. 41(5), 1069–1087.  Google Scholar
  42. Karpoff, J. M./Lee, D. (1991): Insider trading before new issue announcements, Financial Management, 18–26.  Google Scholar
  43. Ke, B./Huddart, S./Petroni, K. (2004): What insiders know about future earnings and how they use it: evidence from insider trades, Journal of Accounting and Economics, Vol. 35(3), 315–346.  Google Scholar
  44. Keown, A. J./Pinkerton, J. M. (1981): Merger announcements and insider trading activity: an empirical investigation, Journal of Finance, Vol. 36(4), 855–869.  Google Scholar
  45. Kolasinski, A./Li, X. (2010): Are corporate managers savvy about their stock price? Evidence from insider trading after earnings announcements, Journal of Accounting and Public Policy, Vol. 29(1), 27–44.  Google Scholar
  46. Korczak, A./Korczak, P./Lasfer, M. (2010): To trade or not to trade: the strategic trading of insiders around news announcements. Journal of Business Finance and Accounting, Vol. 37(3-4), 369–407.  Google Scholar
  47. Lakonishok, J./Lee, I. (2001): Are insider trades informative?, Review of Financial Studies, Vol. 14(1), 79–111.  Google Scholar
  48. Lee, D. S./Mikkelson, W. H./Partch, M. M. (1992): Managers’ trading around stock repurchases, The Journal of Finance, Vol. 47(5), 1947–1961.  Google Scholar
  49. Louis, H./Sun, A./White, H. (2010): Insider trading after repurchase tender offer announcements: timing versus informed trading, Financial Management Vol. 39, 301–322.  Google Scholar
  50. MacKinlay, A. C. (1997): Event studies in economics and finance, Journal of Economic Literature, Vol. 35(1), 13–39.  Google Scholar
  51. Marra, A./Mazzola, P./Prencipe, A. (2011): Board monitoring and earnings management pre- and post-ifrs, The International Journal of Accounting, Vol. 46(2), 205–230.  Google Scholar
  52. Miller, M. H./Rock, K. (1985): Dividend policy under asymmetric information, The Journal of Finance, Vol. 40(4), 1031–1051.  Google Scholar
  53. Moeller, S. B./Schlingemann, F. P. (2005): Global diversification and bidder gains: a comparison between cross-border and domestic acquisitions, Journal of Banking and Finance, Vol. 25(3), 533–564.  Google Scholar
  54. Mughal, A./Tao, Q./Sun, Y./Xiang, X. (2021): Earnings management at target firms and the acquirers’ performance, International Review of Economics and Finance, Vol. 72, 384–404.  Google Scholar
  55. Nwidobie, M. (2013): Agency conflict and corporate dividend policy decisions in Nigeria, Asian Economic and Financial Review, Vol. 3(8), 1110–1121.  Google Scholar
  56. Peasnell, K. V./Pope, P. F./Young, S. (2005): Board monitoring and earnings management: do outside directors influence abnormal accruals?, Social Science Electronic Publishing.  Google Scholar
  57. Persons, J. (1997): “Heterogeneous Shareholders and Signaling with Share Repurchases,” Journal of Corporate Finance, 3, 221–249.  Google Scholar
  58. Pettit, R. R./Ma, Y./He, J. (1996): Do corporate insiders circumvent insider trading regulations? The case of stock repurchases, Rev Quant Finance Account, Vol. 7:81–96.  Google Scholar
  59. Peyer, U./Vermaelen, T. (2009): The nature and persistence of buyback anomalies, The Review of Financial Studies, Vol. 22(4), 1693–1745.  Google Scholar
  60. Piotroski, J. D./Roulstone, D. T. (2005): Do insider trades reflect both contrarian beliefs and superior knowledge about future cash flow realizations?, Journal of Accounting and Economics, Vol. 39(1), 0–81.  Google Scholar
  61. Qing, H. (2016): Is there information leakage prior to share repurchase announcements? evidence from daily options trading, Journal of Financial Markets, Vol. 27, 79–101.  Google Scholar
  62. Raad, E./Wu, H. K. (1995): Insider trading effects on stock returns around open-market stock repurchase announcements: an empirical study, Journal of Financial Research, 45–57.  Google Scholar
  63. Sawicki, J./Shrestha, K. (2008): Insider trading and earnings management, Journal of Business Finance and Accounting, Vol. 35(3) and (4), 331–346.  Google Scholar
  64. Seyhun, H. N. (1986): Insiders’ profits, costs of trading, and market-efficiency, Journal of Financial Economics, Vol. 16(2), 189–212.  Google Scholar
  65. Sloan, R. G. (1998): Do stock prices fully reflect information in accruals and cash flows about future earnings?, The Accounting Review, Vol. 71(3), 289–315.  Google Scholar
  66. Tao, Q./Zhao, Z./Zhang, M./Xiang, X. (2018): Managerial Placement and Entrenchment, Emerging Markets Finance and Trade, Vol. 54(14), 3366–3383.  Google Scholar
  67. Udpa, S. C. (1996): Insider trading and the information content of earnings, Journal of Business Finance and Accounting, Vol. 23(8), 1069–1095.  Google Scholar

Abstract

Share repurchase conveys information to investors and influences stock price in capital market. Normally when a company announces share buyback, the company’s stock price will rise immediately. Thus, some insiders may take advantage of this pattern and create a fake repurchase event. When the stock price rises due to the announcement, the insiders can sell their shares at a higher price, which is insider trading of fraudulent share repurchase. We study short-term reactions around the repurchase event, using a sample of 2,272 repurchase firms in the Chinese stock market from 2013 to 2019. The main finding is that insider trading around the repurchase event is prevalent and insider trading of fraudulent repurchase is most serious. We also find that companies with more serious agency problem and poorer corporate governance are more likely to engage in fraudulent repurchase, and that companies with lower EPS and ROA, larger firm size and higher leverage are more prone to have fraudulent repurchase event. This paper can provide practical guidance in differentiating the normal repurchase from the fraudulent repurchase.