What Citigroup found when it studied 30 years of director dealings

There is a moment, somewhere in the archive of every serious study of stock market behaviour, where the data says something so obvious in retrospect that it almost feels embarrassing to point it out. Manolis Liodakis had that moment in 2006.

Liodakis was a quantitative analyst at Citigroup. In June of that year he published a piece of research titled “Searching for Alpha” that asked a deceptively simple question: do directors actually know something useful when they buy or sell shares in their own companies?

The answer, after examining roughly thirty years of disclosed director dealings on the London market, was yes. Substantially yes. Directors who buy their own company’s shares tend to be right. Their companies’ share prices outperform in the months that follow. The signal is not perfect and it is certainly not a guarantee, but as a systematic indicator of value and future direction, insider buying has a track record that most professional fund managers would be quietly envious of.

The logic is not hard to follow. A director who uses their own money to buy shares at the current market price is making a statement that is more credible than any press release or broker note. They cannot hedge it. They cannot claim later that they were misquoted. The skin is genuinely in the game. When a chief executive or finance director decides to part with real money to buy shares they already hold a large position in, something significant is usually happening in their assessment of the company’s prospects.

Liodakis found that buying signals were considerably stronger than selling signals, which also makes intuitive sense. Directors sell shares for all sorts of reasons that have nothing to do with their view of the company. Tax planning, divorce settlements, school fees, diversification after years of salary paid largely in options. The selling side of the ledger is noisy. The buying side is cleaner.

The research also found that the signal was strongest in smaller companies. This is not surprising either. In a large-cap FTSE 100 company, a director buying £50,000 of shares is a rounding error against a market capitalisation that might run to tens of billions. In a small-cap with a market cap of £100 million, the same purchase represents a meaningful commitment. The director is moving the needle, at least psychologically, on their own wealth. The signal carries more weight precisely because the stakes, relative to the company, are higher.

So far, so encouraging for the director-following strategy. Then came 2007.

Liodakis published his research in June 2006, more than a year before the credit crunch began to take hold. His findings were based on historical data from calmer conditions. When the storm arrived, the model broke down badly. In the year from November 2007, portfolios built on director-buying signals dropped by around 52 per cent. The broader market fell sharply during the same period, but not by that much. Directors were buying into their own companies on the way down and getting it badly wrong. Their informational advantage over the direction of their own business meant relatively little when the entire financial system was experiencing a crisis of a kind that had not been seen in living memory. Macro risk overwhelmed company-specific insight.

This is worth sitting with for a moment. It is not an argument against following director dealings. It is an argument for understanding what kind of signal you are actually working with. Directors know their own companies. They do not necessarily know where interest rates are going, whether a bank in New York is about to collapse, or how badly consumer confidence will fall. Their edge is local, not macro. In calm markets, local knowledge matters a lot. In systemic crises, it can look embarrassing.

The research has held up reasonably well in the years since. Studies using more recent data have broadly confirmed the Liodakis findings: director buying is a statistically significant positive signal, particularly in smaller companies, and particularly where the purchase is large relative to the director’s existing holdings and to the company’s market cap. Multiple directors buying around the same time is a stronger signal than a single purchase. Directors buying in the open market, rather than exercising options, is generally more meaningful.

The regulation around disclosure has also become more rigorous since the research was published. Under the UK Market Abuse Regulation, which replaced earlier rules in 2016, directors must disclose dealings within three business days. The data is published on the Regulatory News Service and picked up by services such as Investegate, SharePad and the London Stock Exchange’s own news feed. For anyone willing to set up an alert, the information is genuinely accessible and free.

What has changed since 2006 is not the underlying signal. The change is in how many people now know about it. When Liodakis published his findings, director-dealing strategies were largely the province of specialist quant desks and a handful of well-informed private investors. Two decades on, the research is widely cited, the data is freely available, and screening tools that filter director purchases by size and frequency are built into standard retail platforms. Whether the edge has been arbitraged away is a legitimate question, though the evidence suggests it has been narrowed rather than eliminated.

The practical lesson from thirty years of Citigroup data is straightforward. Director buying is worth tracking, particularly in small and mid-cap companies, particularly when the purchase is sizeable relative to the director’s existing position, and particularly when it happens in the absence of obvious external reasons for the buy. It is not a signal to act on in isolation. But as one input among several, it has been shown, consistently and across different market conditions, to be more useful than most.

Just do not rely on it when the financial world is falling apart. At that point, everyone, including the directors themselves, is guessing.

This post is drawn from The Street-Smart Trader by Ian Lyall. Republished with permission.

Street Smart is a series drawn from first-hand experience of the City of London, updated as each new chapter arrives.

Disclaimer: The value of investments can go down as well as up, and you may get back less than you invest. This article is for informational and educational purposes only and does not constitute financial advice. Always do your own research and consider seeking independent advice before making any investment decision.