"Unlocking Market Insights: Comparing Three Strategies Based on Directors' Shareholding Data"

Preface

In the stock market, the shareholding ratio of directors has always been a key indicator for investors. Changes in insider holdings often signal their confidence in the company’s future development and have potential impacts on stock prices. However, identifying meaningful changes in shareholding ratios from vast data can be challenging for investors.

To address this issue, we filter out companies with significant changes in the shareholding ratios of directors and conduct backtesting in Taiwan stock market. Through TEJ Director’s Holding database, we can efficiently uncover the potential relationship between management's actions and stock price movements, and evaluate the performance of this strategy to help investors capture hidden opportunities in the market.

In this article, we will give you a comprehensive introduction to Directors’ Holdings and the comparison of three strategies based on the change of shareholdings. Curious about how to use director shareholding ratios to predict stock price trends and gain an edge in your investments? Let’s explore the secret of it in the following paragraphs.

What is the Director Holding Ratio and its Regulations in Taiwan?

The directors' and supervisors' shareholding ratio refers to the proportion of shares held by the company's directors and supervisors relative to the company's total capital. The level of this ratio serves as one of the indicators of top management's confidence in the company's prospects. According to Article 2 of the "Regulations Governing the Shareholding Ratio of Directors and Supervisors of Public Companies and the Verification of Compliance", companies are required to maintain a specific shareholding ratio for directors and supervisors based on their capital size. This legal restriction ensures that the interests of directors and supervisors align with those of the company, preventing decisions detrimental to the company's long-term development and addressing agency problems.

The Implication of the Level of Director’s and Supervisors’ Holding Ratio

High Directors' and Supervisors' Shareholding Ratio

When the shareholding ratio of a company’s directors and supervisors is high, it is often seen as a sign of the management’s active involvement in the company’s operations. This is because their financial interests are closely tied to the company’s performance. Moreover, it enhances external investors’ confidence in the company’s future, contributing to the stability of the internal management team. External investors are likely to have a more optimistic outlook on the company’s long-term development when they see management “standing with the company.” This trust can lead to positive market reactions, potentially driving the stock price higher.

In addition, a high directors’ and supervisors’ shareholding ratio may indicate that management has a stronger voice in corporate governance, enabling them to more effectively implement strategic decisions. For a company with a clear development direction, this can enhance its competitiveness in the market.

Low Directors' and Supervisors' Shareholding Ratio

When the directors’ and supervisors’ shareholding ratio is low or significantly decreases, the market may interpret this negatively. A reduction in management’s shareholding can be seen as a lack of confidence in the company’s future prospects or even as a sign of adverse changes within the company. In such cases, external investors may grow concerned about the company’s future performance and may choose to reduce their investments or withdraw entirely.

This shift in market sentiment often has a negative impact on the company’s stock price. Particularly in cases where directors and supervisors significantly reduce their holdings, panic selling may occur, causing the stock price to plummet rapidly. Furthermore, a low shareholding ratio among directors and supervisors could mean weaker management influence in corporate governance, making the company more susceptible to external interference—a potential risk to the company’s long-term stable operations.

After understanding the shareholding ratio restrictions in Taiwan and how the level of shareholding ratio may reflect management's confidence in their own company, this article will outline three investment strategies based on the TEJ shareholding ratio database. These strategies will then be evaluated using a backtesting system to assess their strengths and weaknesses, providing investors with guidance on how to use directors' shareholding data to develop effective strategies.

Click here to learn how to implement strategies based on shareholding data