William J. McNally

The information content of Canadian open market repurchase announcements

Purpose - This study seeks to examine the role of firm characteristics and insider private information in affecting Canadian firms’ repurchase decision and the associated announcement period stock return. Design/methodology/approach - Past studies of announcement returns employ a standard event-study methodology, which produces biased parameter estimates when the corporate event is voluntary. This study employs the conditional event study methodology, which is free of self-selection bias. The conditional model also provides a direct test of whether private information is conveyed through the announcement. Findings - It is found that firms are more likely to buy back shares if they have greater free cash flows, lower market-to-book ratios, poor prior stock performance, and their insiders have large shareholdings. It is shown that the announcement period returns are strongly and positively related to the private information possessed by company insiders. The market reacts to the reason given for the repurchase and reacts less positively to repeat repurchases. Overall, the evidence is consistent with Isagawas model which argues that repurchases signal that the insiders are not the type to waste their free cash flow. Research limitations/implications - This methodology should also be applied to US open market repurchases. Originality/value - This is the first study to: explicitly test whether the abnormal return is attributable to private information; employ the conditional event study methodology in examining the announcement return; and study the returns to Canadian repurchase announcements.

Do Insiders Play by the Rules

The article studies compliance with insider trading regulations of the Ontario Securities Act (OSA) and the Toronto Stock Exchange. In contrast to the scarcity of prosecutions, we find large-scale evidence of insider trading and reporting violations. For example, from 1987 to 2000, approximately 50 percent of firms engaging in stock buybacks do not disclose their trades to the Ontario Securities Commission as required under the OSA. Furthermore, the volume of insider trading is much higher than expected before material news announcements. We offer a number of policy prescriptions to improve compliance.

Do Brokers of Insiders Tip Other Clients

We examine trading activity around insider transactions on the Toronto Stock Exchange and find evidence that some traders mimic insider positions. Our unique data set allows us to establish a direct connection between insiders, their brokerages, and the brokerages’ other clients. The findings are consistent with the possibility that some brokerages tip their clients about insider trades. Insiders in our sample have good timing; returns are usually positive (negative) after insider purchases (sales). Insiders’ good timing translates to the mimicking transactions, which appear to be profitable net of trading costs. Evidence consistent with tipping is observed mainly for smaller independent brokerages. This paper was accepted by Brad Barber, finance.

The Effect of Transparency on Insider Trading Disclosure

Dans cette étude, nous évaluons l’ampleur des erreurs contenues dans les rapports de délits d’initié au cours de la période 1988–2006. Nous observons qu’en 1988 40 % des rapports comportaient des erreurs, alors qu’en 2006 la proportion avait considérablement baissé pour n’atteindre qu’un peu plus de 10 %. Nous expliquons que ces progrès sont largement attribuables aux changements de réglementation – réduction des délais de divulgation de l’information et mise en place d’un système d’envoi des rapports par Internet – qui ont accru la transparence. Nous offrons ensuite quelques suggestions de politiques permettant de réduire encore plus les erreurs dans les rapports de délits d’initié.