Do corporate press releases drive media coverage?

We examine the role of voluntary corporate press releases about firms' financial performance as a stimulus for financial media coverage. We find that there is a spike of media articles on the same day and one trading day following firms' press releases. We provide evidence that managers compete for media attention and can use voluntary press releases to increase their firms' media coverage; a firm's issuance of press releases attracts more media articles about the firm leading to greater abnormal returns and trading volumes. Our results are robust to controlling for firm characteristics, different model specifications as well as regular earnings announcements, which have been the focus of prior literature. We also show that our inferences are not sensitive to managers' duty to disclose material information to investors. Collectively, our findings suggest that media coverage decisions can be influenced by a firm.     

Firm-level political sentiment and corporate tax avoidance

This paper examines how managers' tone on political issues in earnings conference calls relates to corporate tax avoidance. We find a positive relationship between managers' tone of using political linguistics and tax avoidance, while controlling for non-political tone. The relationship is more pronounced for firms with greater political exposure, higher lobbying expenditures, greater information asymmetry, and more risk-taking. The empirical results remain robust with various additional checks. Overall, our evidence suggests that managers employ the sentiment of political risk disclosure for aggressive tax purposes.     

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.     

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.     

Insider trading,future earnings,and post-earnings announcement drift

This paper examines the association between insider trading prior to quarterly earnings announcements and the magnitude of the post-earnings announcement drift (PEAD). We conjecture and find that insider trades reflect insiders’ private information about the persistence of earnings news. Thus, insider trades can help investors better understand and incorporate the time-series properties of quarterly earnings into stock prices in a timely and unbiased manner, thereby mitigating PEAD. As predicted, PEAD is significantly lower when earnings announcements are preceded by insider trading. The reduction in PEAD is driven by contradictory insider trades (i.e., net buys before large negative earnings news or net sells before large positive earnings news) and is more pronounced in the presence of more sophisticated market participants. Consistent with investors extracting and trading on insiders’ private information, pre-announcement insider trading is associated with smaller market reactions to future earnings news in each of the four subsequent quarters. Overall, our findings indicate insider trading contributes to stock price efficiency by conveying insiders’ private information about future earnings and especially the persistence of earnings news.     

Do Insiders Manipulate Earnings When They Sell Their Shares in an Initial Public Offering?

In this article we examine whether insider share selling in an initial public offering (IPO) influences R&D expenditures. Insiders (managers and venture capitalists) who sell their pre‐offering shareholdings might try to increase the IPO offer price (1) by overinvesting in R&D to signal the firm's prospects (the signaling hypothesis) or (2) by underinvesting in R&D to increase current reported earnings (the earnings fixation hypothesis). We find that, for a sample of 243 IPOs from 1986 to 1990, change in R&D spending in the year of the IPO is negatively related to managerial selling. Because reductions in R&D spending increase current earnings at the expense of future earnings, our evidence suggests that managers believe that investors place more emphasis on current earnings and less emphasis on R&D and therefore spend less on R&D. We also document a positive association between discretionary current accruals in the offering year and managerial selling, suggesting that selling managers manipulate accruals as well.     

Misvaluation and Insider Trading Incentives for Accrual‐based and Real Earnings Management

We investigate the incentives that misvaluation creates for: (1) insider trading; and (2) concurrent earnings management through both accruals and real activities. Managers of overvalued firms have an incentive to sustain overvaluation through income increasing earnings management and, at the same time, to sell their shares (Jensen, 2005 ). Managers of undervalued firms benefit from buying their firm's shares, however the negative effects of downward earnings management may offset incentives to enhance trading advantages. The results indicate that managers of both over‐ and under‐valued firms act opportunistically, managing earnings upward (downward) with accruals while selling (buying) shares. The Sarbanes‐Oxley Act of 2002 (SOX) has been largely ineffective in eliminating trading motivated earnings management. Finally, we do not find evidence of a relationship between managerial trading and real earnings management.     

Insider-trading,discretionary accruals and information asymmetry

Using US data for the period from 2004 to 2012 and alternative discretionary accruals measures, we examine whether insiders manipulate earnings in an asymmetric information environment to profit from their informed trades, and whether the intervening information environment influences the relationship between earnings management and insider trading. We show that insider trading dominated by sell trades has a positive association with discretionary accruals. The incremental effect of information asymmetry as well as the interaction with insider trading is also prevalent in this relation, confirming the moderating effect of asymmetric information. Further, we show that the active involvement of some key insiders in high discretionary accruals is for personal benefit more in growth firms than in value firms. Our results also suggest that earnings management allows for insiders’ opportunistic, rather than routine, buy and sell trades. Our findings highlight that regulators should oversee and scrutinise both insider trading and earnings management to mitigate the risk of the opportunistic behaviour of insiders to avoid future corporate scandals.     

Insider trading and response to earnings announcements: the impact of accelerated disclosure requirements

This paper contributes to the debate on the consequences of increased disclosure regulation by investigating the effects of expedited reporting requirements of Form 4 filings, mandated by the Sarbanes–Oxley Act (SOX), on the market response to earnings announcements. We first confirm that SOX reduces opportunistic insider trading without deterring insider trading due to diversification needs, and that post-SOX, opportunistic insider trades more strongly reveal upcoming earnings surprises. We then document that, at the earnings announcement date, earnings response coefficients (ERCs) are lower when earnings are preceded by opportunistic insider trades. We conclude that accelerated disclosures of insider transactions mandated by SOX lend to more informationally efficient prices prior to earnings announcements. Our findings stand as one piece of evidence suggesting positive externalities from recent Securities and Exchange Commission (SEC) disclosure regulation and add to the scarce evidence on the consequences of changes in Form 4 filing requirements.     

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.     

Predicting earnings in a poor information environment

Financial intermediaries, such as analysts, play an important role in providing information to investors. However, a large segment of the market (about 39% of CRSP firms between 1992 and 2009) is not served by financial analysts, leaving investors in a poor information environment. In this paper, we examine whether other publicly available information signals, such as insider trades, institutional holdings, and firms’ stock repurchases, can be used to predict information about earnings for these firms. We find that CFOs’ trading decisions are associated with new information contained in the annual earnings reports for firms with no or scant analyst coverage. In contrast, for firms with multiple analyst coverage, insider trading decisions are not predictive of new information in earnings reports. Our results suggest that some public information signals, such as insider trades, can be used to alleviate the poor information environment faced by investors. However, the market may not have fully priced the information contained in these signals.     

Earnings Quality, Insider Trading, and Cost of Capital

Previous research argues that earnings quality, measured as the unsigned abnormal accruals, proxies for information asymmetries that affect cost of capital. We examine this argument directly in two stages. In the first stage, we estimate firms' exposure to an earnings quality factor in the context of a Fama‐French three‐factor model augmented by the return on a factor‐mimicking portfolio that is long in low earnings quality firms and short in high earnings quality firms. In the second stage, we examine whether the earnings quality factor is priced and whether insider trading is more profitable for firms with higher exposure to that factor. Generally speaking, we find evidence consistent with pricing of the earnings quality factor and insiders trading more profitably in firms with higher exposure to that factor.     

Insider Trading Restrictions and Analysts' Incentives to Follow Firms

Motivated by extant finance theory predicting that insider trading crowds out private information acquisition by outsiders, we use data for 100 countries for the years 1987–2000 to study whether analyst following in a country increases following restriction of insider trading activities. We document that analyst following increases after initial enforcement of insider trading laws. This increase is concentrated in emerging market countries, but is smaller if the country has previously liberalized its capital market. We also find that analyst following responds less intensely to initial enforcement when a country has a preexisting portfolio of strong investor protections.     

Disclosure strategies among S&P 500 firms: Evidence on the disclosure of non-GAAP financial measures and financial statements in earnings press releases

This paper examines the prominence of non-GAAP financial measures in press releases, testing whether managers emphasize these adjusted performance measures relative to GAAP numbers in four different settings where their disclosure helps managers reach strategic earnings benchmarks on a pro forma basis when they would otherwise fall short using GAAP numbers. Moreover, this research investigates the information content of disclosures reconciling non-GAAP to GAAP earnings (and other financial statements). The data is hand collected from quarterly earnings press releases of a sample of S&P 500 firms during the 2001–2003 period. In this particular sample, the disclosure of non-GAAP financial measures is frequent. The results suggest that managers strategically give more prominence to non-GAAP measures than to GAAP figures when the GAAP earnings number falls short of a benchmark but the non-GAAP earnings number does not. This disclosure strategy may influence the perception of the firm's financial results. Furthermore, the results suggest that both the reconciliation and the non-GAAP income statement contain information useful for users.     

Culture and the regulation of insider trading across countries

We find that individualistic countries regulate insider trading activities more intensely. The result is robust to controlling for alternative culture variables, additional controls, and instrumental variable analysis. We also document that individualism's effect is magnified in democratic countries. In addition, we study the economic and financial consequences of individualism, insider trading regulation, and its enforcement. The analysis suggests that individualism and the enforcement of insider trading regulation promote financial development. Interaction effects reveal that individualism and insider trading regulation serve as complements to promote financial development. These findings contribute to the insider trading debate since regulation alone may not be the primary determinant of market efficiency. Combined, our results challenge prior works concluding that individualism is anti-regulation.     

Insightful Insiders? Insider Trading and Stock Return around Debt Covenant Violation Disclosures

This study asks whether insider trading associates with an information advantage around first‐time debt covenant violation disclosures in SEC filings, which potentially results from early access to information about the debt covenant violation disclosure. We document two results. First, we find net insider selling up to 12 months before a debt covenant violation disclosure, which precedes investors' negative returns before disclosure; and net insider buying up to 12 months after disclosure, which precedes investors' positive returns after disclosure. Second, we show that net insider trading one to two months before and after the violation disclosure associates predictably with investors' short‐term reaction to the covenant violation announcement.     

Analyst talent,information, and insider trading

We examine 1984–2018 data and show that the talent or ability of sell-side financial analysts affects a covered firm's information environment—more so than the simple number of analysts covering a firm. We find that while analysts in general produce market and industry-level information, high-ability analysts contribute more firm-specific information. Firms covered by high-ability analysts experience significantly less insider trading prior to positive earnings news. Results only reside in opportunistic (not routine) trades. When an analyst initiates (terminates) coverage we find decreased (increased) subsequent insider trading. Both changes are primarily driven by analyst talent. Analyst ability also negatively relates to insider trading profitability.     

Disclosure tone management and labor unions

By analyzing the influence of labor unions on the narrative content of corporate disclosures, we provide empirical evidence that managers deflate the tone of earnings press releases in order to convey to unions a less optimistic image of firm financial performance. We find that the tone of the qualitative information in earnings press releases is significantly less optimistic as the degree of unionization increases, and particularly when financial performance is strong. The results of quasi‐natural experiments suggest that labor unions causally affect the use of tone deflation, and the deflation is stronger during labor negotiations. Our findings also indicate that labor unions lead to a significant weakening of the signaling value of the tone of earnings press releases in predicting future performance.     

Shadows in the Sun: Crash risk behind Earnings Transparency

Prior studies suggest that earnings and non-earnings information can be complementary to each other (Lundholm, 1988). Given the co-existence of both components, a lack of non-earnings information can end up boosting earnings explanatory power on returns in certain circumstances, producing spuriously high earnings transparency (ET) in Barth et al. (2013). This scenario is plausible when insiders are motivated to exploit their information advantage and discretionarily alter non-mandatory disclosure strategy. Conditional on higher insider trading profit, we uncover a positive relation between the firm-specific earnings transparency and crash risk. In addition, the above relation is more pronounced with respect to selling and profitable insider transactions. Overall, we demonstrate a potential dark side of high earnings explanatory power on stock returns, conditional on higher likelihood of non-earnings information hoarding.     

The accuracy of IPO earnings forecasts in Thailand and their relationships with stock market valuation

In order to help reduce information asymmetry between managers and prospective investors, IPO prospectuses in Thailand are required to publish managers' forecasts of the forthcoming year's earnings. This type of direct disclosure is especially important in a developing economy such as Thailand where financial intermediaries and information vendors are relatively sparse, and where investors are rarely professionals. Our results demonstrate that managers' earnings forecasts are much more accurate than extrapolations of historical earnings. We show that forecast accuracy is related to underpricing, and it has a directional, but not statistical, association with one-year stock returns and one-year wealth relatives.