RFS Advance Access published online on April 13, 2009
Review of Financial Studies, doi:10.1093/rfs/hhp027
What Do Independent Directors Know? Evidence from Their Trading
Columbia Business School
Kellogg School of Management, NBER, and CEPR
Send correspondence to Enrichetta Ravina, Columbia Business School, Finance and Economics Division, 3022 Broadway, Uris Hall 822, New York, NY 10023; telephone: 212-854-1031. E-mail: er2463{at}columbia.edu.
JEL Classification: G3, G34, K22
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Abstract |
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We compare the trading performance of independent directors and other executives. The findings reveal that independent directors earn positive substantial abnormal returns when they purchase their company stock, and that the difference from the same firm's executives is relatively small at most horizons. We also find that executives and independent directors make higher returns in firms with the weakest governance, the gap between these two widens in such firms, and that independent directors sitting on the audit committee earn higher returns than other independent directors at the same firm. Independent directors also earn significantly abnormal returns when they sell the company stock in a window before bad news and around earnings restatements.
We would like to thank Yakov Amihud, Tom Berglund, Patrick Bolton, Menachem Brenner, Eliezer Fich, Ilan Guedj, Steve Kaplan, Kose John, Patricia Ledesma, Debbie Lucas, Randall Morck, Holger Mueller, Maurizio Murgia, Bernt Ødegaard, Matthew Richardson, Ioanid Rosu, Carola Schenone, Geoffrey Tate, Michael Weisbach, and David Yermack; seminar participants at Columbia University, the Federal Reserve Bank of New York, Georgetown University, New York University, Northwestern University, the University of Chicago, and the University of Southern California; participants at the 2006 WFA Annual Meeting, the 2006 North American Summer Meeting of the Econometric Society, the 2006 SED Annual Meeting, and the Olin Washington University 3rd Annual Conference on Corporate Finance, the NBER Summer Institute in Corporate Governance, and the European Finance Association 2007 Annual Meeting; and an anonymous referee for their comments. We also thank Eliezer Fich for sharing his board size data with us. Peggy Eppink provided excellent editorial help. All remaining errors are our own. This work was supported by the Zell Center for Risk Research at Northwestern University.