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Directors’ Security Purchases on Security Performance: Evidence from Colombo Stock Exchange

Abstract

The separation of ownership and control is a key feature of modern corporate entities (Gregory et al., 2009). Consequently, compensation arrangements may include equity options to balance shareholders' preferences with directors and managers. Still, this raises additional issues when a director wants to trade their company securities since they have access to more significant information about the company. As a result, this study examines how directors’ security purchase transactions would result in security performance in Sri Lanka. Moreover, this study examines how security purchase transactions based on directors’ gender, would result in security performance. This is due to the in risk attitudes and access to information based on the director’s gender are different. The analysis covers the period from 2013 to 2019, which includes 141 directors' security purchases reported in Colombo Stock Exchange (CSE). The research issues are investigated using the event study methodology. Overall, the results show that significant negative cumulative average abnormal returns are followed by directors' security purchase transactions after three days. Hence, it shows that the directors' security purchase transactions are rapidly reflected in security prices on the event date and up to the three days from the event date, and after that inefficiency levels prevail in the market. In terms of gender-wise, male directors' security purchase transactions result in to have significant negative cumulative average abnormal returns after ten days, whereas the absence of significant cumulative average abnormal returns is found for female directors’ security purchase transactions. It is observed that the market perceives the category of gender is informative when making trades after a few days of the transactions. Finally, when it comes to the speed of incorporating directors' security purchases information into security prices, both male and female directors' security purchase transactions are rapidly reflected in security prices. However, inefficiency levels prevailed in the market for male directors’ security purchase transactions after ten days. This study concluded that directors’ security purchase transactions do not yield particularly positive price impact, as well as the CSE is informationally efficient. The results of the study are also important for policymakers to encourage companies to further comply with expanding the set of information that is publicly available about directors’ security purchases. Besides, reporting timelines would limit directors' ability to benefit from their information advantage.

Keywords: Directors’ securities purchases, Colombo Stock Exchange, Female directors, Male directors, Market Efficiency