Changes in earnings announcement tone and insider sales

The evidence from prior literature suggests that insider trading is related to firms' reported financial results and disclosure choices. I contribute to the literature by examining the association between narrative disclosure in earnings announcements and insider trading. Specifically, I hypothesize and find a positive association between changes in the optimistic tone of earnings announcements and CEOs' subsequent equity sales. In addition, I hypothesize and find that this relation is mitigated by the Sarbanes–Oxley Act and litigation risk. CEOs' financial gain from selling equity after more optimistic earnings announcements is small relative to their total compensation.     

Are trading bans effective? Exchange regulation and corporate insider transactions around earnings announcements

There is considerable controversy on the role of corporate insider trading in the financial markets. However, there appears to be a consensus view that some form of regulation concerning their activities should be imposed. One such constraint involves a trading ban in periods when corporate insiders are expected to be advantaged vis-à-vis the information flow. This paper directly tests whether constraints of this kind are effective in curtailing insider activity through a study of the trading characteristics of UK company directors. The London Stock Exchange Model Code (1977) imposes a two-month close period prior to company earnings announcements. We find that although the close period affects the timing of director trades, it is unable to affect their performance or distribution. Directors consistently earn abnormal returns irrespective of the period in which they trade. They tend to buy after abnormally bad earnings news and sell after abnormally good earnings news. Moreover, there are systematic differences in the trading patterns of directors surrounding interim and final earnings announcements. It appears that many corporate insiders have private information and exploit this in their trading activities. As a result, one can conclude that trading bans do not impose significant opportunity costs on the trading of corporate insiders.     

Why do insiders trade? Evidence based on unique data on Swedish insiders

In this paper, we examine if corporate insiders have other motives for trading besides exploitation of private information. Our results show that insiders’ portfolio re-balancing objectives, tax considerations and behavioral biases play the most important role in their trading decisions. We also find that insiders who have allocated a great (small) proportion of their wealth to insider stock sell more (less) before bad news earnings disclosures. Finally, insider selling is informative for future returns among those insiders who have the greatest proportion of wealth allocated to insider stocks.     

Insider trading in loss firms

This study investigates whether insiders in loss firms trade their company stock differentially around new loss and loss reversal earnings announcements. Research suggests that the likelihood of litigation influences managers' stock trading decisions prior to material events. I hypothesize and find that insiders reduce their net stock sales in a monotonic manner before a new loss announcement presumably to avoid improper trading allegations before bad news. This decrease is more pronounced if the new loss is the start of a multiple loss sequence. In contrast, there is no significant change in net trading patterns in the quarters prior to a loss reversal announcement irrespective of whether the loss reversal is the start of a single profit or multiple profit sequence indicating that insiders seem less concerned about legal implications when trading before good news. The results suggest that insiders in loss firms perceive asymmetric litigation risks to trading stock in the quarters before bad news relative to good news and act accordingly.     

Is there information content from insider trading activities preceding earnings and dividend announcements in Hong Kong?

This study examines whether insiders (directors) exploit information advantage of their firms by trading stocks before the simultaneous earnings and dividend announcements in Hong Kong. Our findings show that there are significant net-insider-buying activities before the announcements of good news ('Earnings-Dividend Increase') and significant net-insider-selling activities before bad news ('Earnings-Dividend Decrease' and 'Earnings Decrease-Dividend Zero'). In addition, our regression results provide some support for the hypothesis that there is a predictive relation between pre-event insider trading activity and the abnormal return of the announcements.     

Information content of earnings announcements in the New Zealand equity market,a longitudinal analysis

We compute abnormal return variance and abnormal trading volume in the 3‐day window surrounding earnings announcements to examine the information content of earnings announcements in the New Zealand equity market over the past 16 years. We find that the information content of earnings announcements has increased significantly over time, and this finding holds true for both interim and preliminary earnings announcements. We find evidence that earnings announcements with June year‐ends exhibit a higher level of information content and experience a more pronounced rising trend as compared to earnings announcements with non‐June year‐ends. Several firm characteristics appear to relate to the level of the information content of earnings announcements as well as to compound the trend over time. We document an important finding that the information content of earnings announcements increases remarkably in the period after the adoption of the International Financial Reporting Standards (IFRS).     

Applying developed‐country regulation in emerging markets: an analysis of Thai insider trading

This paper undertakes an out‐of‐sample test of developed‐country insider trading regulation in an emerging market environment (Thailand), where severe information asymmetry, lax enforcement and poor pricing efficiency are endemic. Thai insider trading regulation, which mimics developed market rules, fails on all three measures of success. Insiders trade with impunity during a regulated trading ban. Their trading performance outperforms other investors at all times, and they continue to exploit their privileged position with respect to information flow. Our study suggests it is inappropriate for emerging market regulators to adopt developed market regulation without first considering the unique characteristics of their own environment.     

Insider trading and risk aversion

This paper is a continuous time version of Holden and Subrahmanyam (Economics Letters 44 (1994) 181). The paper extends Kyle (Econometrica 53 (1985) 1315) by introducing risk aversion on the side of the monopolist informed trader and allows for the liquidity traders instantaneous demand to depend on cost of trading, as well as on the risk of the stock. The main result of the paper is that, in equilibrium, the price pressure decreases with time regardless of the elasticity of the liquidity demand function.     

The effect of the summer doldrums on the market reaction to earnings announcements

Hong and Yu (2009) document a significant decrease in trading volume and returns during the summer months. Given the tendency of noise traders to buy shares following both positive and negative earnings surprises (Lee, 1992), we hypothesize that reduced trading activity by noise-traders results in less of an earnings announcement premium during the summer. Consistent with our hypothesis, we find lower abnormal returns surrounding summer earnings announcements compared to non-summer announcements. We also find lower abnormal returns in the ten days prior to the announcement, consistent with less front-running by sophisticated investors. Finally, we show that these summer effects are stronger in recent years characterized by more online trading and greater noise trader participation.     

Are active fund managers collectors of private information or fast interpreters of public information?

Recent studies of fund manager performance find evidence of outperformance. However limited research exists as to whether such outperformance is because of privately collected information, or merely expedient interpretation of publicly released information. In this study, we examine the trade sequences of active Australian equity fund managers around earnings announcements to provide insights into the source of fund managers’ superior information. We document an increased occurrence of buy‐sell trade sequences around good‐news earnings announcements. The evidence is consistent with fund managers having both private information about forthcoming good‐news earnings announcements and being ‘short‐term profiteers’. We find no evidence that fund managers have private information about forthcoming bad‐news earnings announcements. However, we do find an increase in the frequency of fund managers not trading before bad‐news earnings announcements only to subsequently sell during announcements.     

Front-Running by Mutual Fund Managers: A Mixed Bag

This paper evaluates the welfare implications of front-runningby mutual fund managers. It extends the model of Kyle (1985)to a situation in which the insider with fundamentals-informationcompetes against an insider with trade-information and in whichnoise trading is endogenized. Noise traders are small investorstrading through mutual funds to hedge non-tradable or illiquidassets. The insider with trade-information is one of the fundmanagers. We find that her front-running activity reduces theliquidity costs of her customers, but it also reduces theirhedging benefits. As a result, the customers of the front-runningmanager may be worse off and place smaller orders. The oppositeis true, however, for those investors who are not subject tofront-running. In aggregate, front-running has either no orpositive consequences for welfare. JEL Classification. G14,G23.     

Information transfer and firm‐level strategy

In this article, I examine a previously unexplored avenue for information transfer: similarities in firms’ strategies. This examination is based on the idea that information transfer is likely to be positively related to similarity in business activities. Drawing on the concept of generic strategies found in the strategy literature, I develop a measure of strategic distance between firms. Using this measure, I provide evidence that information transfer is positively related to the similarity of firms’ strategies. In addition, I find that this information transfer is strongest when the announcing firm is large or has persistent earnings.     

Are individual investors liquidity providers around earnings announcements? Evidence from an emerging market

We first document that both buying and selling by individual investors before earnings announcements are negatively correlated with post-event abnormal returns using a unique dataset that allows us to precisely identify individual investor trading. Next, we show that both buying and selling by individual investors before earnings announcements not only are positively associated with contemporaneous returns, but also respond positively to past returns. This is consistent with the idea that individual investors act as liquidity providers (demanders) when they sell (buy) before earnings announcements. Individual investor buying and individual investor selling after earnings announcements confirm this point.     

Stock market dynamics with rational liquidity traders

In the Kyle (1985) finite horizon model of stock market dynamics with a trader who holds long-lived information, informed trading intensities rise with time, and the slopes of the equilibrium price schedules fall. This paper shows that this result depends crucially on the irrational liquidity trader assumption. We replace the irrational noise traders with a sequence of rational, risk averse, liquidity traders who receive endowment shocks to their holdings of the risky asset. We demonstrate that unless liquidity traders are sufficiently risk averse, the slope of equilibrium price schedule rises over time, while informed trading intensities fall. In particular, Kyle's result holds only when liquidity traders are so risk averse that they ‘over-rebalance’ their portfolio's holdings of the risky asset, so that their final holdings of the risky asset have the opposite sign of their initial position.     

Pricing of Foreign GAAP Earnings in U.S. Capital Market Prior to the SEC Required Reconciliation Disclosure

The Securities and Exchange Commission (SEC) requires foreign registrants to include in their annual reports on Form 20-F reconciliation to U.S. GAAP of net income, earnings per share, and shareholders' equity, if materially different. Previous research indicates that foreign firms usually file their reports with the SEC near or at the deadline, that is six months after the fiscal year-end and about three months after the earnings announcement. The purpose of this study is to examine U.S. investors' ability to interpret foreign GAAP earnings before the SEC regulated disclosure becomes publicly available. Presented empirical evidence indicates that market participants are able to infer U.S. GAAP earnings from the foreign GAAP earnings at the time of initial earnings announcements.