Ian Tonks

Ian Tonks

Directors' Dealing Secrets Revealed

Research released by the University of Exeter Business School reveals that by following company directors’ Buy trades of Value stocks investors would generate impressive returns. The same success cannot always be matched by following directors’ Sell trades in Glamour stocks.

Research released by the University of Exeter Business School reveals that by following company directors’ Buy trades of Value stocks investors would generate impressive returns. The same success cannot always be matched by following directors’ Sell trades in Glamour stocks.

Professors Alan Gregory, Ian Tonks, and Dr Rajesh Tharyan found that company directors consistently trade in a contrarian fashion. They buy more Value stocks and sell more Glamour stocks, and they buy following price falls and sell following price rises.

The research* covered every director’s share trade made on the London Stock Exchange between 1986 and end of 2003. Post trade share price performance was analysed over a 2 year period (to end 2005). The heaviest out-performance was concentrated in smaller value companies. Directors’ trades in these small value stocks show an average abnormal share price return of up to 20% more than control groups of similar firms over 2 years.  Directors’ trades in large value stocks shows a more modest outperformance of just over 6% over the same period. 

Professor Alan Gregory of the University of Exeter commented:
“Our research shows that corporate insiders (both non executive and executive) make use of their private information to generate abnormal returns. This information is not reflected in the metrics constructed from publicly available information. Directors’ trading signals clearly significant returns on Value stocks on the Buy side, whereas the modest negative returns on the “glamour” stocks’ sell side are not generally significant”

Professor Ian Tonks added:
“The relative out-performance that directors achieve in buying Value stocks persists for up to 2 years, and are in excess of size and value / glamour benchmarks. This implies clearly that directors are using more than a naive contrarian strategy. The abnormal returns are concentrated in value stocks in general, and in smaller Value stocks in particular.”

The methodology used:

  • Data was taken from Hemmington Scott post 1995 and from Gregory et al (97) data  for pre-95 transactions
  • It covered all FTSE All share UK plcs 1986 to 2003 (16,848 trades)
  • Open market purchases and sales of common stock only
  • Investment trusts, property companies, insurance companies and banks were excluded
  • Trivial trades (Net value less than £20,000) were removed
  • Accounting data was from Hemscott and Datastream. M&A information was from London Stock Database Price (LSPD)
  • Stock price/return data had to be available on LSPD

*Insider trading in Value and Glamour stocks (University of Exeter: Alan Gregory, Rajesh Tharyan and Ian Tonks). The full research paper can be viewed at http://www.exeter.ac.uk/xfi/workingpapers/0904.pdf

A Bloomberg feature on the research can be viewed here and an interview with Professors Tonks and Gregory can be viewed here.

Date: 15 December 2009

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