As discussed in Section 6.4, the methodology of calendar-time abnormal returns is better for presenting cross-sectional data. Therefore, it applies Fama- French 3-factor models, to examine the relationship between abnormal returns, firm characteristics and director role.37
37
It uses the same UK Fama-French 3 factors data as Gregory et al. (2013). Data taken from:
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6.5.2.1 Calendar-Time Abnormal Returns with Firm Characteristics
Table 6.4 presents the results of Fama-French 3-factor calendar time portfolio regressions of firm characteristics (size and B/M). Panels A-D display the performance of director purchasing trading in 6-, 12-, 18- and 24-month holding periods respectively.
For 6-month holding time, all firms except small/low achieve positively significant abnormal returns (Panel A). Among these positive returns, those of small/medium, small/high, big/low and big/high are all significant at 1% significance level, while big/medium is significant at 10% significance level. Small/high firms get the best abnormal returns (2.76% per month).
The results for 12-month holding periods (Panel B) are similar. The abnormal returns of small/low are negatively insignificant, and the rest are all positive. However, the monthly abnormal returns and the magnitude of significant levels are lower than those shown in Panel A. The abnormal returns of small/medium are 2.57% with 1% significance on 6-month holding, but falls to 1.04% with 10% significance on 12-month holding time. On 6-month holding, small/high firms receive 2.76% abnormal returns per month with significance at 1% significance level, but on 12-month holding periods, the firms get 1.56% abnormal returns with 5% significance. The abnormal returns of big/low firms drop sharply from 1.90% with 1% significance in Panel A, to only 0.03% in Panel B. Big/medium firms maintain their abnormal returns and significance: the firms obtain 1.56% abnormal returns per month on 6-month holding, and 1.53% on 12-month holding. Both of these returns are significant at a 10% significance level. The abnormal returns of big/high decrease from 2.10% per month with 1% significance in Panel A, to 1.22% with 10% significance in Panel B.
Panels C and D show the results for 18- and 24-month holding periods. Consistently with Panels A and B, the abnormal returns of small/low firms are negative, while the rest are positive. However, none of firms shows any
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significance. This means that after a 12-month holding time, by controlled excess returns of market index, size and B/M effects (Fama-French 3 factors), no firm group could not make any significant none-zero abnormal returns.
The findings of Table 6.4 are that small/low firms make negative abnormal returns, none of which were significant. The rest of the firm groups achieved positive abnormal returns, but none of them made any significant, none-zero abnormal returns beyond 12-month holding time. The firm groups small/medium, small/high, big/medium and big/high could achieve positively significant abnormal returns on 6- and 12-month holding times; however, the value of these abnormal returns decreases. Big/low firms could only make positively significant abnormal returns on 6-month holding time. After that, the value and significance magnitude of the abnormal returns dropped sharply to almost zero.
Generally, these results indicate that both small and big firms could make positive significant abnormal returns, as could medium and high B/M firms.
6.5.2.2 Calendar-Time Abnormal Returns with Firm Characteristics and Director Role
Like Table 6.3, Table 6.5 splits every size-B/M portfolio into two director groups: Executives and Non-Executives. Panels A-D present the performance of directors’ abnormal returns on 6-, 12-, 18- and 24-month holding periods respectively.
For 6-month holding time (Panel A), both Executives and Non-Executives of big/medium and big/high firms make positively significant abnormal returns. Meanwhile, Executives of small/medium and small/high and Non-Executives of big/low firms also obtain positively significant abnormal returns. Directors in small/low firms do not achieve significant abnormal returns.
Panel B shows the results for 12-month holding periods, where only Executives of small/high and big/high and Non-Executives of big/medium had positive
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significant abnormal returns. Of these, only Executives of small/high make 1% significant abnormal returns (1.87% per month).
For 18-month holding time (Panel C), only Executives of small/high firms achieved positively significant abnormal returns of 1.76% per month, which are significant at 1% significance level. The abnormal returns of directors in the rest of the firm groups are insignificant.
In Panel D (24-month holding periods), no Executives or Non-Executives in any firm groups show significant abnormal returns. Only Executives of small/high firms come close to the 10% significant level (1.36% abnormal returns per month with WLS t-value 1.57).
The findings of Table 6.5 are consistent with those of Table 6.4 that almost abnormal returns occur on 6- and 12-month holding times. Both Executives and Non-Executives in big firms obtain positively significant abnormal returns; meanwhile, in small firms (small/medium and small/high), only Executives could receive positively significant abnormal returns. However, the results here differ from those of Table 6.4, as on 18-month holding time, Executives of small/high firms could still get 1% significant abnormal returns (1.76% per month).
All these findings indicate that, regardless of the firm’s B/M, directors in all big firms (except Executives of big/low firms) could get significant abnormal returns on 6-month holding time. Some of them even continued to receive abnormal returns until 12-month holding time. Furthermore, Executives of small/high firms could make very positively significant none-zero abnormal returns up until the 18-month holding time: this implies that they have access to some superior information about the companies, which helps them to make a better profit than other investors, including Non-Executives in their companies. Another interesting result is that, in big/low and big/medium firms, the performance of Non-Executives is better than that of Executives. This is probably because Non-
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Executives in these firm groups are more independent to make sensitive judgements, based not only on company information but also on competitors of the company, movements in the industry, market and macroeconomy.