Information Disclosure and Insider Trading Around Board Meetings

My new paper (available here) features a novel dataset of firms’ regular board meeting schedules, hand-collected from corporate by-laws. Corporate by-laws include a provision about when and where regular board meetings will be held. Most firms keep this description vague but some firms nonetheless specify board meeting schedules in their by-laws. Typically, these by-laws specify the months, week of the month, and day of the week on which regular board meetings are scheduled to take place (eg, the third Tuesday of each month). My sample comprises over 100 listed firms in the US that disclose schedules of regular board meetings in this format during 1996-2013.

I examine these firms to determine what disclosures they make, how investors react, and whether outside directors trade more profitably around scheduled board meetings. First, firms are three times more likely to disclose news on the day of the board meeting compared to other days. Second, investors react to news on board meetings but do not seem to anticipate the timing of news disclosure―realised volatility increases in response to news disclosure but implied volatility does not build up in advance. Third, outside directors’ insider trades made before a board meeting earn abnormal returns, suggesting that outside directors trade on private information obtained in preparation for board meetings.

This study makes two main contributions. First, it elucidates the role of regular board meetings as a precursor to disclosure. Because board meeting dates are predictable, at least for the set of firms in this study, the timing of disclosure is also predictable. The content of news is likely unknown in advance, but anticipating the timing of disclosure can have important implications for investors who want to exploit this opportunity or avoid trading due to the uncertainty.

Second, it exposes an avenue for outside directors to make informed trades. In preparation for a board meeting, outside directors typically receive information in advance. This information is not publicly disclosed for a certain period of time or never disclosed at all because it is deemed immaterial. More importantly, because board meeting dates are usually not verifiable ex-post, it is difficult or impossible for outsiders to scrutinise directors’ source of informed trading. This study provides evidence that regular board meetings are important information events of which investors and regulators should be more aware.

Seil Kim is a Doctoral Candidate at New York University and will be joining Baruch College at the City University of New York as an Assistant Professor of Accounting in Fall 2016.