Publicly traded homebuilders’ and insiders’ trading: a new perspective

Abstract

Purpose

The purpose of this paper is to examine the insiders’ activities (buy/sell) during the recent meltdown of the homebuilders’ industry.

Design/methodology/approach

This study applies a regression model to analyze the relationship between the insiders’ net sales and variables that could be affecting the trading decisions controlling for other market variables.

Findings

The results show that CEOs of homebuilding companies had net positive selling activities and enjoyed massive gains by timing the market correctly. The insiders’ massive selling period was followed by significant declines in share prices of homebuilding companies. More specifically, CEOs (but not all top executives) acted as contrarian investors and sold when the share prices hit a record high, coupled by optimistic analysts’ recommendations, which were later seen as incorrect by the market. Also, CEOs sold at a time when EPS was at its highest level.

Research limitations/implications

The current work can not disprove the “argument of diversification” cited by insiders as the reason for their stock sell off, mainly because it is not possible to obtain data about the CEOs’ personal portfolios.

Practical implications

This paper implies that CEOs were able to time the market by forecasting the trend in their industry.

Originality/value

The paper investigates the period between January 2004 and August 2007 which is characterized by mass selling by CEOs in the whole industry of home building companies and not only a specific entity.

Citation

Ghosh, S. and Abdou, K. (2009), "Publicly traded homebuilders’ and insiders’ trading: a new perspective", Managerial Finance, Vol. 35 No. 9, pp. 803-821. https://doi.org/10.1108/03074350910973711