(Bloomberg) -- Celebrity CEOs, is there anything they can’t do? Yes: tell you about their company’s prospects simply by trading.
So says a new study that compared the prescience of market signals embedded in share transactions by “star” chief executives with those of their less-famous brethren. Researchers found that if you’re looking to base a strategy on insider buying, go with the corporate leaders nobody’s heard of.
“Trades of non-star CEOs predict future abnormal returns and earnings innovations,” Sanjiv Sabherwal of the University of Texas at Arlington and Mohammad Riaz Uddin of the American University of Beirut wrote in a research paper. “Trades of star CEOs do not.”
It’s a minor finding that touches on some larger market questions, including the uneven record of insider trades as market signals recently. It’s also a lens into the conscience of the corporate class. The authors speculated that lower-profile CEOs are confident they can fly below the radar when putting job intel to work for their own benefit.
To classify an executive as a “star,” the authors used three standards: whether the executive won a lot of “best CEO”-type awards; how often web users looked up the name on Google; and how much attention he or she got from media outlets. The study, “Does stardom affect the informativeness of a CEO’s insider trades?”, looked at S&P 1500 CEOs from 2004 to 2011, and plotted returns after the executives bought or sold their own company’s stock.
After controlling for factors including market momentum and CEO compensation, the authors found that both purchases and sales of stock by lesser-known executives are “strong predictors” of returns over the next six months. On average, when classified by awards won, stock purchases by relatively unknown insiders were followed by a return of 6.4% for company shares, while sells were met with declines of 5.2%.
On the other hand, “star buys and sells are not good predictors of future abnormal returns, as neither coefficient is statistically significant,” the authors wrote. “Trades by non-star CEOs are informative and trades of star CEOs are not informative.”
The study also makes a point to differentiate between so-called opportunistic and routine trades, the former meant to exploit information and the latter executed over a preset time, often for the purposes of liquidity. The authors found that non-star CEOs place more opportunistic trades than their high profile peers.
Why? For one, because people pay so much attention to the stars, it’s possible they are discouraged from risky behavior, the authors said.
“Because star CEOs attract greater public attention and higher scrutiny by regulatory bodies, they are less likely to trade based on their superior private information,” Sabherwal and Uddin wrote. “Trades of non-star CEOs are likely to contain useful private firm-specific information and have the power to predict future returns.”
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