Corporate insider selling reached a multi-year high in the first quarter of the year, but corporate treasury share buybacks surged at the same time. The study found that corporate executives are likely to actively sell their holdings with their left hand and buy back with their right, which is not good news for investors who are long on the market.
Insider trading with insider trading accounts can do more good than harm to a company’s future market, however, using a company’s cash for treasury share buybacks is mostly a bad decision based on historical data.
Winston Chua, data analyst at Informa Financial Intelligence, said insider share sales hit a 14-year high in the first quarter of this year, and at the same time, corporate treasury share buybacks are accelerating, with total buybacks in the first quarter being the largest in the past seven quarters.
In terms of the S&P 500, the lowest treasury share repurchase rates over the past 15 years occurred at the bear market lows of March 2009 and March 2020. In theory, the timing of corporate execution of treasury share buybacks, if judged properly, should result in the highest treasury share repurchase rate during a bear market, not the lowest.
Change in S&P 500 treasury buyback rate (Chart: Marketwatch)
Rob Arnott, founder of Research Affiliates, says the trend of insider buying and treasury buybacks is no coincidence, as corporate executives are able to sell their holdings during the announcement of treasury buybacks without affecting market liquidity.
That’s Arnott’s hypothesis, but academics such as Alex Edmans of the London Business School found a similar phenomenon in the Equity Vesting month of news investment strategies published in the Review of Financial Studies in 2018.
The study found that U.S. corporate executives typically manipulate news during equity vesting months, increasing the frequency of positive news and delaying or suppressing neutral, negative news.
One of the ways that executives manipulate this positive news strategy is by announcing the timing of new stock buybacks. The study concluded that the CEO’s manipulation led to a temporary increase in stock prices and market liquidity, which the CEO was then able to profitably close.
This demonstrates why the stock market remains so strong when executives sell off their shares. The increase in share buybacks mitigates the correction of the sell-off, while historical data also suggests that treasury buybacks only temporarily delay the impact of insider selling.
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