Insider trading and corporate spinoffs

• Main Authors: CHAROENWONG, Charlie, DING, Kuan Yong David, PAN, Jing
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2023
• Subjects: Insider trading; Undervaluation; Corporate spinoffs.; Corporate Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7240; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8239/viewcontent/InsiderTrading_2023_pvoa.pdf
• Institution: Singapore Management University

This paper studies insider trading to examine undervaluation as a motive behind corporate spinoffs. We show an unmistakable increase (decrease) in the number of insider purchases (sales) and net purchases (sales) in the four quarters prior to a spinoff announcement. In addition, relative to a benchmark period, insider selling is significantly lower, and their net purchases significantly higher, in the three quarters prior to a spinoff announcement compared to other periods. We find that announcement period excess returns for abnormal net insider purchases are significantly higher than excess returns for abnormal net insider sales. Moreover, only firms with abnormal net insider purchases exhibit significant improvement in their long-run market and operating performance after a spinoff. The results suggest that undervaluation is an important motive behind corporate spinoffs and that it is possible to identify the quality of a spinoff firm on the basis of insider trading behavior prior to its announcement.