Revisiting market reactions to directors’ dealings for JSE – Listed firms: An information environment perspective

What the paper says

Purpose: Directors’ dealings have the potential to provide valuable information to the market. The purpose of this study is to determine whether the market reaction to directors’ dealings has any relationship with other available sources of information about the company (i.e. its ‘information environment’). Design/methodology/approach: Market reaction to directors’ dealings was measured in an event study. Thereafter, a regression analysis was performed to examine the relationship between market reaction and indicators of the firm’s information environment. Findings/results: Directors’ dealings trigger statistically significant abnormal returns for small companies during the anticipation and event window and for medium and large companies during the post-event window. We find statistically significant relationships between the market reactions to directors’ dealings and various indicators of the information environment. There is a significant relationship between market reactions and analyst following (in large- and medium-sized firms) and bid-ask spread (in small companies). Practical implications: Directors’ trades possess differing levels of informational value, depending on the information environment of the firm, with implications for market efficiency and corporate reporting. Originality/value: The juxtaposition of research on directors’ dealings and the information environment contributes to two strands of research that are often studied in isolation.