02 de November, 2020

Important Finance Journal publishes an article by faculty members Harold Contreras and Francisco Marcet

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The Sell-Side Analyst Heterogeneity and Insider Trading research shows how market analysts and their forecasts on company profits are decisive for executives when selling their own company shares (Insider Trading).

 

"Executives strategically choose moments to sell their own company shares when the legal loophole is low and the impact that their transactions may have on their share price is minimal," indicates the research carried out by fellow Harold Contreras in co-authorship with Professor Francisco Marcet from the FEN Administration Department, which was recently accepted and published in the Journal of Corporate Finance, a prestigious and widely respected magazine in the field of Finance.

 

The research indicates that "to sell the shares of their own company, executives identify predictions made by "top analysts", who attract more attention from investors, and sell shares when the financial results of their companies are better than the predictions made by these analysts”.

 

As a precedent, the research indicates that the sales of shares carried out by executives (officials, directors or beneficial owners of publicly traded companies) are controversial, since these are investors who have access to private information about their firms and know them better than any market analyst, hence these operations remaining highly questioned. Over time, in the United States and around the world, the regulation of the use of privileged information in transactions has been tightened, so that insiders are required by law to disclose all their operations in a timely manner. For this reason, these transactions are concentrated in the periods after the earnings announcements.

 

After analyzing the transactions carried out by executives and other financial information from a sample of companies listed on the United States Stock Exchange, which includes the periods between January 2003 and December 2016, the research authors realize that “ top executives sell shares more aggressively, depending on the heterogeneity of the analysts, when the forecasts they make in the accounting reports are met or exceeded, after their publication, with the aim of hiding their profitable sales”.

 

Similarly, the authors argue that, as a result of this selling strategy, stock prices become less efficient and slowly adjust to their transactions”.

 

The researchers explain that although “the latest works in academic literature suggest that executives interpret public information better or are more attentive to it than external investors, and use this to their advantage to carry out profitable transactions, the results of this study contributes to show that executives also use a specific mechanism to exchange public information and sell shares, in times of strict regulation”.

 

In this case, the mechanism is associated “with the salient characteristics that certain analysts have for investors, since they are motivated to camouflage their operations by identifying situations in which they know that their trades will have little impact on the future stock price performance”.

 

Journal of Corporate Finance

The journal publishes high-quality original research manuscripts or papers, from a theoretical or empirical perspective, that analyzes issues related to corporate finance.

 

Some of the areas of interest include financial structure, payment policies, corporate restructuring, financial contracts, corporate governance agreements, the economics of organizations, the influence of legality, structures and international financial management.