Informed trading by non-financial companies

ABSTRACT

It is well documented in the finance literature how share prices go up when companies increase dividend payouts. The long-term trend, however, is that more companies now retain excess cash rather than paying dividends. In this paper, I investigate if companies retain cash to invest on private information in domestic stock markets. I look at 20,620 domestic non-financial companies trading shares on the Oslo Stock Exchange (OSE) over the period 1993 to 2006. I find that companies earn excess risk-adjusted-returns from active trading. I conclude that companies retain at least some cash to take advantage of private information.

KEYWORDS:

• Companies
• portfolio choice
• portfolio performance

JEL CLASSIFICATION:

• G11
• G14
• G15

Acknowledgments

I thank the OSE VPS and Bernt Arne Ødegård for generously providing security holdings and factor return data, respectively.

Disclosure statement

No potential conflict of interest was reported by the author.