US Financial Institutions: Reputational Risk and Senior Management Sell Decisions

The firm’s stock price is affected when an insider such as a high ranking manager or board member, sells the firm’s equity. This action can be construed as a signal of changes in expectations of firm’s future cash flows. Does this action affect reputation as well? Using insider sell decisions as proxy, particularly in periods of declining returns, we investigate the existence and the possible consequences of a risk to firm reputation as a result of the sell decisions of top managers. Data from 55 US financial institutions, for the period 2003-2005, was used to undertake two kinds of analysis to test the hypothesis that sell actions have a negative effect on share price. We conducted a daily event study adopting a multi-factor model. An estimated of the pooled data using the Heteroskedasticity Consistent Covariances shows unsatisfactory results. However, we found a significant market reaction around the event dates when managers decide to sell their stocks during periods when they anticipated a negative trend of returns with an absolute magnitude higher than the market one