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Institutional investment in repurchase stocks: insider trading information

Jin-Ying Wang (Department of Risk Management and Insurance, Ming Chuan University, Taipei, Taiwan)

Managerial Finance

ISSN: 0307-4358

Article publication date: 24 June 2020

Issue publication date: 11 November 2020

217

Abstract

Purpose

This study explores whether institutional investors can distinguish an undervalued share repurchase from a falsely signaled share repurchase. This study also aims to determine what information institutions use when investing in repurchase stocks.

Design/methodology/approach

This study uses unique Taiwanese data and concentrates on foreign institutions because they are the most sophisticated investors in Taiwan.

Findings

The results show that foreign institutional trading in open market repurchase (OMR) stocks will earn both positive concurrent and post-OMR excess returns. In addition, there is a significant positive relationship between pre-OMR insider trading and foreign institutional trading during the OMR period; that is, foreign institutions follow insiders to trade their OMR stocks.

Practical implications

This study finds that foreign institutions use publicly available data on insider trading to choose OMR stocks and create excess returns. This encourages individual investors without private information, who can also earn a positive return if they diligently study available public information.

Originality/value

This study contributes to the international investment literature by determining the price impacts associated with foreigner trading in the firm-level returns of the host country. In addition, this study finds that foreign institutions choose OMRs based on insider trading information, which fills the gap in existing studies on share repurchasing. Moreover, this study enriches the insider literature by showing how foreign institutions can benefit by using insider trading information.

Keywords

Acknowledgements

I wish to thank Professor Don T Johnson (the editor) and two anonymous reviewers for helpful comments. I also gratefully acknowledge the financial support of the Ministry of Science and Technology of Taiwan (grant #: MOST 104-2410-H-130-011). Any remaining errors are mine.

Citation

Wang, J.-Y. (2020), "Institutional investment in repurchase stocks: insider trading information", Managerial Finance, Vol. 46 No. 10, pp. 1305-1319. https://doi.org/10.1108/MF-10-2019-0531

Publisher

:

Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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