Insider Trading around Dividend Announcements: Theory and Evidence

Authors

  • KOSE JOHN,

  • LARRY H. P. LANG

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    • Professor of Finance and Assistant Professor of Finance, respectively, at the New York University Stern School of Business, New York. Helpful comments from Warren Bailey, Ernest Bloch, Aswath Damodaran, Franklin Allen, Kathleen Hagerty, Merton Miller, Banikanta Mishra, David Nachman, and Jayaraman Narayanan are acknowledged. For detailed comments and suggestions on earlier drafts, we thank an anonymous referee and René Stulz, editor of the Journal. Kose John received financial support from a Yamaichi Faculty Fellowship and a New York University Summer Research Grant. Part of this research was conducted when Kose John was a Visiting Professor at the Graduate School of Business, University of Chicago, and Larry Lang was a Visiting Assistant Professor at the College of Business, The Ohio State University.

ABSTRACT

The informational role of strategic insider trading around corporate dividend announcements is studied based on the efficient equilibrium in a signalling model with endogenous insider trading. Insider trading immediately prior to the announcement of dividend initiations has significant explanatory power. For firms with insider selling prior to the dividend initiation announcement, the excess returns are negative and significantly lower than for the remaining firms (with no insider trading or just insider buying) as implied by our model. Another implication is that dividend increases may elicit a positive or negative stock price response depending on the firm's investment opportunities.

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