The acquisition of shares by managers of publicly traded companies is closely monitored by minority shareholders and financial analysts, who generally see it as a sign of their confidence in the company’s prospects, and sometimes as an indication of a potential stock price increase in the short or medium term.
Since they are in a permanent insider position, managers of listed companies are subject to certain obligations related to preventing insider trading violations. Most issuers also implement measures to prevent the misuse of inside information.
In accordance with the European Market Abuse Regulation[1] (“MAR”), which aims to prevent and detect market abuses, every issuer must disclose inside information[2] that directly concerns them as soon as possible. However, they may delay publication only when the following three conditions are simultaneously met:
- Immediate disclosure is likely to prejudice the legitimate interests of the issuer[3];
- The delay in disclosure is not likely to mislead the public;
- The issuer is able to ensure the confidentiality of that information.
MAR also sets out several specific provisions regarding managers[4] of publicly traded companies and of the persons closely associated. It prohibits them from conducting transactions during blackout periods—30 calendar days before the announcement of an interim financial report or an annual report[5]. Indeed, during this period, managers may have early insights into the results through internal accounting reports.
Additionally, managers must report transactions involving the financial instruments of a listed company no later than three business days after the transaction date. This requirement ensures that minority shareholders are informed of managers’ transactions, as the declarations are published by the AMF (Autorité des Marchés Financiers) on its website.
These various provisions contribute to the efficiency and transparency of financial markets. In principle, their enforcement should undermine the investment strategy of following managers’ moves by purchasing or increasing stakes in stocks recently acquired by them.
To verify this assumption, we examined the declarations made by managers of publicly traded companies, as published by the AMF at the beginning of 2023 and 2024[6]. We then compared the annual returns of the affected stocks with those of the CAC All-Tradable index, used as the benchmark stock market index.
Following our study, our main findings are as follows:
- There is no established link between the amount invested by managers, their role within the company, and the difference in returns compared to the benchmark index.
- Two-thirds of the stocks involved in managers’ acquisitions underperformed the benchmark index, with a significant gap in most cases[7].
- Small-cap stocks recorded a lower average return compared to large caps, meaning that an equally weighted portfolio[8] composed exclusively of stocks acquired by managers would have yielded zero returns, despite the stock market’s rise over the analyzed period.
- A portfolio weighted by the market capitalization of the stocks acquired by managers[9] would have generated a return 4 points below the benchmark index in 2023 and an excess of 1 point in 2024.
In conclusion, it can be argued that an investor who engaged in stock-picking based on managers’ transactions would likely have underperformed compared to a passive investment strategy. The differences in returns can vary depending on the period under review, the investment horizon, and the applicable stock market regulations. However, our study suggests that making profitable trades by simply following managers’ transactions is unlikely, as such an investment strategy tends to rely more on psychological factors than on rational elements.
[1] Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014.
[2] The notion of inside information is defined by Article 7 of MAR as an “information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments”.
[3] The European Securities and Markets Authority (ESMA) has issued guidelines with an indicative list of issuers’ legitimate interests, as well as situations in which a delay in disclosure, although justified by the existence of a legitimate interest, may be likely to mislead the public.
[4] In accordance with Article 3 of MAR, a “person discharging managerial responsibilities” means a person within an issuer who is a member of the administrative, management or supervisory body of that entity or a senior executive who has regular access to inside information and power to take managerial decisions affecting the future developments and business prospects of that entity.
[5] The AMF considers that the publication of a press release by an issuer regarding annual and semi-annual results constitutes the announcement of said results within the meaning of Article 19(11) of MAR.
[6] We examined a total of 125 executive declarations from around fifty publicly traded companies, published by the AMF during the first half of January 2023 and 2024.
[7] We observed a performance shortfall of more than 5 percentage points in 90% of underperformance cases.
[8] The construction of an equally weighted portfolio requires investing the same amount in each security, thereby giving each one the same weight within the portfolio.
[9] We consider that the portfolio thus constructed would be sufficiently diversified to compare its performance with that of the benchmark index.