Evaluating the relationship between the market reaction to directors’ dealings and the information environment: Evidence from the JSE

Abstract

Background: Directors' dealings are closely monitored as they may provide valuable information to the market about the company. However, the relationship between stock market reactions to directors’ dealings and the information environment is underexplored in a developing country context such as South Africa. Purpose: The purpose of this study is to first determine the market reaction to directors’ dealings. Thereafter, this research will determine whether the market reaction to directors' dealings has any relationship with each company’s information environment. Method: The cumulative average abnormal returns (CAAR) and the cumulative average abnormal volume (CAAV) were calculated to measure the stock price and trading volume reaction to the directors’ dealings. Thereafter, a regression analysis was performed using the CAAR and the CAAV as the dependent variables and the indicators for the information environment as independent variables to determine if there is a relationship between the stock price and trading volume reaction to directors’ dealings and the company’s information environment. Results: The event study results show that directors’ dealings trigger statistically significant abnormal returns for small companies during the anticipation and event window. Statistically significant abnormal volumes were present for medium and large companies during the post- event window. The regression results show a statistically significant relationship between abnormal returns and bid-ask spread for small companies as well as between abnormal returns and analyst following for medium companies. Furthermore, there is a statistically significant relationship between abnormal volume and company size for medium companies as well as between abnormal volume and analyst following in large companies. Implications: The variation in significance across company sizes suggests that directors’ trades convey differing levels of informational value depending on firm characteristics. This has important implications for market efficiency, corporate governance, and regulatory policy, particularly in emerging markets where transparency and investor confidence are critical. Contribution: This research contributes to the existing literature on the information efficiency of markets and JSE event study literature. This research contributes to insights into the quality of the information environment and how each indicator of the information environment impacts investor perceptions and market outcomes.