Astute U.S. executives with corporate ties to China sold stock in their companies during the preliminary stages of the COVID-19 outbreak in that nation, weeks before the virus spread internationally and was labeled a pandemic.
By acting quickly, the insiders avoided some $300 million in aggregated losses, selling stock before the pandemic-induced decline in the stock market.
Those are the findings of UConn accounting professor George Plesko, head of the accounting department, and two colleagues, Erin Henry ’14 Ph.D. and Caleb Rawson, both professors at the University of Arkansas. Their research is pending publication in the Review of Accounting Studies.
“The key takeaway is that executives with particular expertise or knowledge were able to interpret news events faster and more efficiently than those who didn’t, and in this case acted on that knowledge to avoid declines in the value of their portfolios,’’ Plesko says. “Although COVID was initially viewed by many as a health care crisis, it had a tremendous impact on many aspects of business and the economy as well.’’
The market overall was slow to respond to the coronavirus outbreak, Plesko and his colleagues say, but insiders of firms with production or supply-chain activities in China were better able to incorporate and act on information related to the outbreak.
The idea for the research came from a conversation Plesko had with a business executive who was making plans to protect American workers based on experiences in China. The fact that the company was changing operations extremely early in the pandemic, made Plesko and his co-authors wonder if managers were also adjusting their stock ownership in anticipation of the economic effects the pandemic would have on their own companies.
To investigate, the researchers searched and compiled data from multiple sources.
“Initially, we had a common-sense hunch, but when we dug into the data, what we found was statistically, and economically, quite significant,’’ he says.
The researchers emphasized that the U.S. executives acted based on public information and there was nothing to suggest that they possessed or received non-public information, which would be a violation of the U.S. Securities and Exchange Acts.
The trio compared the volume of insider sales and raw stock returns during the pre-COVID period from Jan. 1, 2018 to Jan. 18, 2020. They then documented the early stages of the pandemic from Jan. 19, 2020 to April 30, 2020.
Although COVID surfaced in Wuhan, China in late December 2019, it was not deemed a pandemic until March 2020, at which time global economic activity declined, as did financial markets.
They discovered that prior to the COVID outbreak, the stock sales and returns by executives with and without connections to China were similar. During the second timeframe, the stock sale patterns diverged, with China insiders selling stocks ahead of the initial market declines caused by the pandemic.