Insider Trading and Earnings Management

Abstract:  This paper analyzes the relationship between earnings management and insider trading, specifically investigating whether discretionary accruals are related to insider trading and valuation. We find strong evidence of insiders managing earnings downward when buying and managing earnings upward when selling. On the marginal basis, value (high book-to-market value) firms manage their earnings upward compared to growth (low book-to-market value) firms, consistent with a signaling hypothesis. However, the opposite is true on the average basis, consistent with an opportunistic hypothesis.     

Earnings Management in IPO Lockup and Insider Trading: Evidence from Taiwan

This paper examines the hypothesis that the timing of lockup expiration is crucial to earnings management (EM) behavior in the period after an initial public offering (IPO). Taiwan's unique two-stage lockup regulations make the Taiwanese sample an excellent candidate for examining this hypothesis. Three main results are reached. First, we find positive discretionary accruals (DAs) from the IPO quarter to the quarter after the expiration of the first-stage lockup. The DA in the quarter of the second-stage lockup expiration is significantly positive. The evidence shows that the lockup provision is key in the findings of significant EM in the IPO year and the following year. We also find a positive association between DAs in first-stage lockups and subsequent insider selling activity, indicating that insiders' selling after lockup expiration accounts for EM in the lockup period. Third, the extent of EM in first-stage lockup is negatively related to that around the IPO, consistent with the reversal nature of DAs.     

Information‐Hedging Disclosures and Insider Trading

I model the effect of disclosure on the tradeoff between information risk, liquidity risk, and price risk for a well‐informed, risk‐averse insider. Revealing some information before trading decreases the variability of the insider's information advantage and thus reduces his information risk. Disclosure also lowers adverse selection costs for market makers, which reduces the insider's liquidity risk by increasing his trading flexibility. However, disclosure increases price risk for the insider because the price fully reflects the revealed information. The reduction in information and liquidity risks outweigh the rise in price risk when the insider is less risk averse because a less risk‐averse insider's information‐based motive for trading is stronger than his hedging motive. The opposite relation holds when the insider is more risk averse. Therefore, a less (more) risk‐averse insider experiences an increase (decrease) in welfare when he discloses some information before trading. Cost of capital and policy implications are identified.     

Cross‐Firm Real Earnings Management

Our analysis is rooted in the notion that stockholders can learn about the fundamental value of any firm from observing the earnings reports of its rivals. We argue that such intraindustry information transfers, which have been broadly documented in the empirical literature, may motivate managers to alter stockholders’ beliefs about the value of their firm not only by manipulating their own earnings report but also by influencing the earnings reports of rival firms. Managers obviously do not have access to the accounting system of peer firms, but they can nevertheless influence the earnings reports of rival firms by distorting real transactions that relate to the product market competition. We demonstrate such managerial behavior, which we refer to as cross‐firm real earnings management, and explore its potential consequences and interrelation with the practice of accounting‐based earnings management within an industry setting with imperfect (nonproprietary) accounting information.     

Management Earnings Forecasts,Earnings Announcements,and Institutional Trading in China

Abstract:

In this study, we investigate the trading behavior of institutional investors in China according to management earnings forecasts (MEFs) and earnings announcements (EAs). MEFs are mandatory under the stringent regulatory framework in China. We find evidence that both MEFs and EAs have an effect on the market. However, MEFs have a bigger effect on the market than do EAs. According to a sample of semiannual observations of firms from 2003 to 2008, we find that changes in the stock ownership of institutions are positively associated with EAs but not significantly associated with MEFs. When we further examine the relations between institutional characteristics and trading strategies, we find that growth funds exploit the arbitrage opportunity of MEFs.     

业绩预告披露与盈余管理研究

盈余管理存在的根本原因在于投资者与管理层之间的信息不对称。业绩预告作为上市公司未来经营成果、财务状况与现金流量的预测,在很大程度上会影响投资者对上市公司的评估及其投资决策。从业绩预告披露的特征方面出发,研究业绩预告披露与盈余管理之间的关系,包括业绩预告的性质、预告精确度、预告误差分别与盈余管理程度的关系,结果发现：发布业绩预告的公司,盈余管理水平更高。预告精确度以及预告期间与预测当期盈余管理水平正相关,预测误差与盈余管理水平负相关。当消息类型不同的时候,预测的强制性与否以及＂变脸＂对盈余管理水平的影响不同。结论支持了上市公司财务报告迎合业绩预告披露的说法。     

Ex Ante Incentives for Earnings Management and the Informativeness of Earnings

This study examines the relation between ex ante incentives of insurance managers to engage in earnings management to meet regulatory standards and the informativeness of earnings. This study extends prior research by simultaneously examining the effects of earnings management and uncertainty about earnings as suggested by Collins and DeAngelo (1990) and Imhoff and Lobo (1992). Results from a sample of 375 quarterly earnings announcements of 41 property and liability insurers during the period 1989 to 1992 support the hypothesis that when managers' incentives for earnings management are high, earnings announcements are less informative to investors (even after controlling for uncertainty associated with exposure to large-scale catastrophes). Robustness tests suggest that our results are not attributable to firm size, time period effects, firm effects, accounting estimation error, or financial distress risk. These results are consistent with investors using publicly available information to predict P-L insurance managers' ex ante incentives to manage earnings to meet regulatory standards, and that they use this information in forming their beliefs about earnings quality.     

If It's Good for the Firm,It's Good for Me: Insider Trading and Repurchases Motivated by Undervaluation

My findings suggest that information inherent in insider trading can be used to identify undervalued repurchasing firms. I examine the relation between insider trading and the performance of open market repurchase (OMR) firms. I show that firms with high net insider buying prior to OMR announcements not only earn abnormal stock returns in both the short‐ and long‐run, but also exhibit better operating performance. Overall, the evidence is consistent with insiders timing their trades prior to OMR announcements.     

Accruals Management to Achieve Earnings Benchmarks: A Comparison of Pre-managed Profit and Loss Firms

Abstract:  This study examines whether firms with profits before accruals management are more likely than firms with losses before accruals management to meet or exceed earnings benchmarks when pre-managed earnings are below those benchmarks. We extend Brown (2001) by documenting that the differential propensity to achieve earnings benchmarks by profitable and nonprofitable firms results from differential accruals management behavior. We find that firms with profits before accruals management are more likely than firms with losses before accruals management to have pre-managed earnings below both analysts' forecasts and prior period earnings and reported earnings above these benchmarks.     

股权分置改革中的机构合谋与内幕交易

本文考察了股权分置改革过程中机构投资者与非流通股股东之间的合谋问题以及合谋的可能途径——内幕交易。文章的基本发现有两个:第一,在控制了影响股改对价水平的主要因素之后,机构投资者对方案的赞成比例与股改对价水平之间存在显著的负相关关系,而全体流通股股东以及大个体流通股股东对方案的赞成比例与对价水平之间呈现显著的正相关关系;第二,机构投资者对方案的赞成比例越高,公司的内幕交易程度也越高,而其他流通股股东的表决意见与内幕交易程度之间没有显著关系。这意味着机构投资者与非流通股股东利用内幕交易进行了合谋,合谋的结果使得非流通股股东得以支付一个较低的对价水平,而机构投资者则通过内幕交易获得额外收益。     

Insider Trading and Pay‐Performance Sensitivity: An Empirical Analysis

Abstract:   We examine whether the sensitivity of pay to performance is associated with the amount of insider trading that managers undertake. Because insider trading profits represent an alternative form of compensation, we expect that firms will consider the compensation component provided by insider trading when designing remuneration contracts. Employing a proxy for insider trading that captures the degree to which managers trade on private information, we find evidence that an increased (a decreased) level of insider trading is associated with a decreased (an increased) pay‐performance sensitivity.     

股权结构与上市公司应计和真实盈余管理行为

过高的股权集中度会导致显著更高的应计盈余操控行为,而对真实盈余管理行为的影响总体上不显著;无论对于应计盈余操控还是真实盈余操控,机构持股均具有较好的抑制作用;国有控股会导致显著更高的应计盈余操控,但在真实盈余操控方面,更多地体现在异常酌量费用方面;国有控股上市公司管理层持股越高,其应计盈余管理行为越显著,而在真实盈余管...     

The Relationship Between Bank Risk and Earnings Management: Evidence from Japan

Using stock price data drawn from the 1990s in Japan, this paper empirically shows that bank risk is negatively associated with discretionary accruals, indicating that investors misinterpreted high reported earnings as favorable information about bank financial health. We also show that the negative relationship was very powerful prior to the major bank failures in late 1997 and 1998, but it diminished subsequent to the failures. We conclude that investors started to anticipate potential manipulation of financial reports by bank managers more rationally after the major bank failures.     

Dividends and Market Signalling: an Analysis of Corporate Insider Trading

This study tests the multiple‐signal theory of dividends of John and Lang (1991) in the context of a European market. Our evidence shows that investors are more sensitive to insider trading signals than to signalled changes in existing dividends. In effect, the insider sales signal is universally understood as bad news. After controlling for the quality of a firm's investment opportunities, investors are found to penalise dividend outflows by mature firms that exhibit more informed insider sales activity. Finally, we offer an innovative exploration of the role of earnings announcements in market reaction to the dividend signal.     

Earnings Management and the Long-Run Underperformance of Firms Following Convertible Bond Offers

Abstract:  This paper examines whether the long-run underperformance of convertible bond issuers can be explained by earnings management, as reflected in discretionary current accruals around the time of the offer. Consistent with the earnings management hypothesis, we find that convertible issuers who adjust their discretionary current accruals to report higher net income in the issue year will generally experience inferior operating and stock return performance over the five-year post-issue period. Our findings indicate that there is some temporary overvaluation of convertible issuers by the stock market, but that the resultant disappointed investors will subsequently correct their valuation errors. The similarity of our results to those reported within the prior literature on initial public offers (IPOs) and seasoned equity offers (SEOs) suggests that the earnings management hypothesis is not unique to stock offers, but that it actually extends to convertible bond offers.     

The Effects of Corporate Social Responsibility on Real and Accrual‐based Earnings Management: Evidence from China

This study examines the relationship between Chinese firms’ corporate social responsibility (CSR) and their earnings management (EM) practices. As China rapidly emerges as one of the largest exporters as well as importers, an understanding of Chinese CSR practices is increasingly important not only to Chinese authorities and firms, but also to international stakeholders. However, Chinese CSR has been largely underestimated in previous studies, and this CSR–EM relationship has never been sufficiently examined with regard to Chinese firms. In addition, this study measures the level of EM using two different methods: accrual‐based EM (AEM) and real activity‐based EM (REM). In general, REM is regarded as more costly but less detectable, while AEM is regarded as less costly but more detectable, owing to the fact that AEM is subject to greater scrutiny from auditors and regulators. The results show that Chinese firms’ enhanced CSR generally decreases their EM practices. On the contrary, state‐controlled firms and firms operating in more institutionally developed regions are more likely to engage in REM, while increasing their CSR activities. These findings provide new evidence that managers in Chinese firms tend to opportunistically adopt CSR practices according to the firm's institutional environment.     

Board Monitoring and Earnings Management: Do Outside Directors Influence Abnormal Accruals?

Abstract:   This paper examines whether the incidence of earnings management by UK firms depends on board monitoring. We focus on two aspects of board monitoring: the role of outside board members and the audit committee. Results indicate that the likelihood of managers making income‐increasing abnormal accruals to avoid reporting losses and earnings reductions is negatively related to the proportion of outsiders on the board. We also find that the chance of abnormal accruals being large enough to turn a loss into a profit or to ensure that profit does not decline is significantly lower for firms with a high proportion of outside board members. In contrast, we find little evidence that outside directors influence income‐decreasing abnormal accruals when pre‐managed earnings are high. We find no evidence that the presence of an audit committee directly affects the extent of income‐increasing manipulations to meet or exceed these thresholds. Neither do audit committees appear to have a direct effect on the degree of downward manipulation, when pre‐managed earnings exceed thresholds by a large margin. Our findings suggest that boards contribute towards the integrity of financial statements, as predicted by agency theory.     

A Comparison of Earnings Management Between KSE Firms and KOSDAQ Firms

Abstract:   This study investigates differences in earnings management practices of Korea Stock Exchange (KSE) firms and KOSDAQ (a Korean version of the NASDAQ market) firms during the period of 1996–1997. A sample of 1,256 KSE and 577 KOSDAQ firm‐year observations is used to compare earnings management practices of firms listed in the two different stock exchanges. The results of the study reveal that KOSDAQ firms tend to more actively manipulate earnings to avoid losses than KSE firms. KOSDAQ firms generally tend to increase reported earnings more aggressively than KSE firms when their operating cash flows are poor, and play down their reported earnings more when their operating cash flows are exceptionally good. The results of the study are quite robust in the sense that more aggressive earnings management practices of KOSDAQ firms persist even when operating cash flows are controlled.     

Firm- and Country-Level Attributes as Determinants of Earnings Management: An Analysis for Latin American Firms

This article analyzes firm- and country-level determinants of the earnings management for a sample of Latin American companies from 1997 to 2015 by using panel data to deal with the endogeneity and heterogeneity problems. Results show that dividend pay-outs impact positively on earnings management. The ownership structure, however, is a double-edged sword as a controlling mechanism that may constrain earnings manipulation but may also exacerbate it. Concerning country-level variables, we found that the development of the financial system behaved opposite of expectation. Consequently, before inefficient financial markets in Latin America, managers had more room for manipulation of financial statements. The legal and regulatory system, however, proved itself to be efficient in reducing the opportunistic behavior of managers.