Insider trading around auto recalls: Does investor attention matter?
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Insider trading around auto recalls: Does investor attention matter? Omer N. Gokalp1 · Sami Keskek2 · Abdullah Kumas3 · Marshall A. Geiger3
© Springer Science+Business Media, LLC, part of Springer Nature 2019
Abstract Using a comprehensive sample of customer complaints filed with the National Highway Traffic Safety Administration, we examine the differences in the timing of insiders’ and investors’ use of outside generated public information. We first find that levels of customer complaints predict future auto recalls and their financial consequences, suggesting that these publicly available customer complaints contain value-relevant information. We then find that customer complaints are not contemporaneously associated with stock returns but predict large negative abnormal stock returns during the period following the recall announcement. Thus, we find that the market generally fails to impound the information contained in customer complaints in a timely manner. We then examine whether mutual funds, as sophisticated investors, appear to use the complaint data and find that, consistent with the overall market, in the aggregate they do not appear to use the complaint data to inform their trades until after recall announcements. However, mutual funds that focus more of their trades in the auto industry appear to pay more attention to the complaint data and trade consistent with the data before recall announcements. We then find that the top five executives of the car manufacturers in our sample are significant sellers of personal shares prior to the announcement of auto recalls, particularly when customer complaints are high. Our findings suggest that insiders’ informational advantage is at least in part due to general investor limited attention to publicly available information. Keywords Insider trading · Product recalls · Limited attention · Customer complaints
* Abdullah Kumas [email protected] Omer N. Gokalp [email protected] Sami Keskek [email protected] Marshall A. Geiger [email protected] 1
Sawyer Business School, Suffolk University, Boston, MA 02108, USA
2
College of Business, Florida State University, Tallahassee, FL 32306, USA
3
Robins School of Business, University of Richmond, Richmond, VA 23173, USA
13
Vol.:(0123456789)
O. N. Gokalp et al.
JEL Classification G14
1 Introduction A large stream of literature finds that insiders gain personal benefit by strategically timing their trades around important corporate events.1 While some studies (e.g. Machan 1996, Ma and Sun 1998; Manne 1966a, b, 1985; McGee 2008, 2010; Smith and Block 2016) hold the view that insider trading is not necessarily morally wrong and may contribute to the efficiency of stock prices and enhance capital allocation, the dominant view in the literature is that insider trading is unethical, is morally corrupt, and, thus, should be banned (Werhane 1989, 1991; Moore 1990; Snoeyenbos and Smith 2000). Both camps in the insider trading literature, however, make the implicit assumption of information asymmet
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