Directors of listed companies earn abnormal returns by trading in a contrarian manner. This research report investigated whether outside investors can earn abnormal returns by following director contrarian trades. The returns to directors and outsiders, following a director trade were analysed using the event study methodology. The event study methodology utilised director trading information from SENS announcements on the JSE Securities Exchange, daily share prices, betas and price to book values for the selected companies, and daily all share index prices. The focus of the analysis was the post trade Cumulative Average Abnormal Returns (CAAR), in the 20 days following the director trade. The overall CAAR for all transactions was a statistically significant but economically insignificant 0.43%. When viewed from a transaction type perspective, the CAAR was 0.72% and 0.44% for purchases and sales transactions respectively. This study shows that while directors of listed South African companies do earn abnormal returns, they do not do so while consistently trading in a contrarian manner. In fact, transactions not deemed contrarian generated higher abnormal returns for directors. In addition, the study shows that outside investors do not earn abnormal returns by mimicking directors, and actually, their following of director trades generates the abnormal returns for directors. Copyright / Dissertation (MBA)--University of Pretoria, 2010. / Gordon Institute of Business Science (GIBS) / unrestricted

The key objective of this research is to examine various issues relating to trades of UK directors (insiders’) in their company shares. Specifically, we examine the general patterns and characteristics of directors’ trades, the seasonality patterns of aggregate directors’ trades (measured by insider aggregate number and value of insider trading activities), the impact that director’s age has on trade informativeness, and the effect of industry classification on the information content of directors’ trades. To the best of our knowledge, no empirical examination of these issues has yet to be examined. When examining the general patterns and characteristics of directors’ trades, we find that directors buy more frequently than they sell but the average value of sell trades are approximately seven times larger, which suggests that directors sell less frequently but in larger monetary amounts. Furthermore, the majority of trades occur for directors aged between 45 and 65. Small transactions tend to be purchases while large transactions tend to be sells. The majority of the trades were by former directors (for both transaction types) followed by executive and non- executive directors. The majority of trades occurred in the financial industry. When examining the seasonal patterns of aggregate directors’ trades (as measured by the number and the value of insider transactions), the results show that there is a day of the week anomaly in aggregate insider activities. Insiders tend to trade more on Fridays and less on Tuesdays. Also, there is a month of the year anomaly in aggregate insider activities (as measured by the number of insider transactions). Specifically, insiders tend to trade more in March and trade less in August. The impact of director’s age is also examined, and the results suggest that younger directors’ buy transactions produce significantly higher abnormal returns than older directors. There is some evidence of statistically significantly negative CAARs for younger directors’ sell trades. When controlling for director type, we find that younger executives (formers) are more informed about their buy trades than executives (formers) of other age groups. Unlike the previous pattern, older non-executives (over 70) seem to be more informed about their buy trades than younger non-executives. Finally, the results of whether industry classifications have an impact on the informativeness of directors’ trades indicate that abnormal returns are highest for directors of technology industries. The level of information asymmetry has an impact on the informativeness of directors’ trades. Specifically, insider gains are highest, for directors, in high R&D, high volatility, low regulated, highly concentrated, and low CEO compensation industries/sectors.

The topic of insider/director trading raises interesting questions and has generated much attention from researchers, market participants and regulators. The purpose of this thesis is to investigate the long-run director trading performance in the UK market. It examines relationship between aggregate director trading and indicators of the UK macroeconomy focus on the macro-aspects in Chapter 4 and 5. The extant empirical literature on aggregate director trading can be categorized into two parts: the first is the relationship between director trading and the stock market; and the second is the link between stock returns and future aggregate economic activities. Having examined the macro-picture, it goes to examine a more micro-picture. Chapter 6 examines long-run relationship between director trading and market reactions. This thesis is organized around three research studies which are presented in Chapters 4, 5 and 6 and which examine long-run director trading activities in the UK. Chapters 4 and 5 together investigate the evidence for director trading activities and the macroeconomy. There is little literature on aggregate director trading and the macro-economy: therefore Chapter 4 examines the relationship between aggregate director trading and future market excess returns. Empirical evidence is presented which demonstrates that the returns on stock market are significantly correlated to future economic growth. Chapter 5 then examines whether the forecasting ability can be improved by adding aggregate director trading as a measurement of business confidence into the forecasting model. Chapter 6 examines the long-run performance of market reaction to director roles. In order to examine the relationship between aggregate director trading and the macro-economy, the link between aggregate director trading and future market excess returns is investigated. This thesis considers the importance of the seasonality issue in UK director trading and employs a number of alternative seasonality adjustments to adjust the raw data on aggregate director trading. The positive correlation between aggregate director trading and future market excess returns is confirmed and evidence is provided that indicates directors are contrarian: in aggregate they purchase (sell) their own-company stock prior to general stock market increases (decreases). In the long-run, the empirical work demonstrates that aggregate director trading has forecasting power in terms of predicting future stock market excess returns. Additional findings are that aggregate director trading in large firms has a positive significant predictive ability for identifying future excess returns of large firms and aggregate director trading of some industries has positive significant forecasting ability for future excess returns of these industries. Having confirmed the relationship between aggregate director trading and future market movement, this thesis turns to examine the link between aggregate director trading and future UK economic growth. It measures economic growth of future real economic activity by the change in gross domestic product (GDP) and it documents a strong correlation between past aggregate director trading and future real economic activity. The predictability of future economic growth increases with both the length of forecasting horizon and past net number of director trading. In a multivariate regression analysis this thesis finds that aggregate director trading retains predicting power with respect to future GDP growth even after including popular business cycle variables (dividend yield of FTSE All share, growth rate of industrial production and term spread) as explanatory variables. This finding suggests that aggregate director trading captures things related to changes in real activity but not captured by market factors (Fama-French 3 factors: SMB, HML and RMRF) and business cycle variables. After examining the relationship between aggregate director trading, market returns and changes in GDP, the last empirical Chapter of the thesis concentrates director trading on the micro-aspects of director trading and stock movement. It examines the stock market reaction to director trading with firm characteristics and the effects of director trading pattern. Using long-run calendar-time abnormal returns (CTAR) methodology with Fama-French 3-factor model, evidence is presented that directors do have more valuable information allowing them to make significant abnormal returns than other market participants, the performance of CFOs supports the information hierarchy hypothesis in 1- and 6-month post-purchase trading time, and the director trading with firm characteristics has a significant effect on stock abnormal returns.