The authors examine whether the stronger information content of chief financial officer (CFO) insider trading relative to that of chief executive officers (CEOs) results from a different willingness to exploit the information asymmetry that exists between executives and outside shareholders (scrutiny hypothesis) or from differing financial acumen between CFOs and CEOs (financial acumen hypothesis). The authors consider the information content of equity purchases for CEOs and CFOs. The paper aims to discuss these issues.
The authors examine purchase-based insider trading portfolio returns before and after the implementation of SOX in firms with high versus low regulation, for routine and opportunistic managers, and in samples of CEOs with prior CFO experience.
The authors provide evidence that SOX affected executives differently and provide support for the scrutiny hypothesis. CFO-based portfolios remain the most profitable post-SOX, but the magnitude of returns has fallen in absolute and relative terms compared to returns for CEOs. Superior financial acumen of CFOs does not appear to be supported. CEO purchase trade returns appear to be lower than CFO returns because CEOs face greater visibility and scrutiny and thus limit their own trading aggressiveness.
This research contributes to the literature in explaining why CFOs best CEOs in their insider trading purchases and documents that in the post-SOX period, CFO insider trading superiority disappears.
This paper is based on Heather S. Knewtson's dissertation under the guidance of her dissertation chair John R. Nofsinger. The authors thank participants at the 2011 Eastern Finance Association Meeting in Savannah, Georgia, the 2011 Financial Management Association International Meeting in Denver, Colorado and the 2013 Midwest Finance Association Meeting in Chicago, Illinois. The authors are especially appreciative of Inmoo Lee's comments toward improving this research.
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