Insider trading,future earnings,and post-earnings announcement drift |
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| Institution: | 1. Department of Accountancy, City University of Hong Kong, Hong Kong, China;2. School of Accountancy, W. P. Carey School of Business, Arizona State University, United States;1. Research Institute for Economics and Business Administration, Kobe University, Japan;2. Faculty of Business Administration, Momoyama Gukuin University, Japan;3. Graduate School of Business Administration, Kobe University, Japan;1. Faculté de Droit, des Sciences Économiques et de Gestion (ARGUMans), Le Mans Université, Le Mans, France;2. COMSATS University Islamabad, Vehari Campus, Islamabad, Pakistan;3. Emlyon Business School, 23 Avenue Guy de Collongue, Écully, France;4. NEOMA Business School, 1 Rue du Maréchal Juin, 76130 Mont-Saint-Aignan, France;1. ICMA Centre, Henley Business School, University of Reading, Whiteknights, Reading RG6 6BA, UK;2. Department of Finance, Auckland University of Technology, Private Bag 92006, 1142 Auckland, New Zealand;3. EDHEC Business School, 392 Promenade des Anglais, Nice, France;1. Kobe City University of Foreign Studies, 9-1 Gakuen Higashimachi, Nishi-ku, Kobe, Hyogo 651-2102, Japan;2. Graduate School of Economics, Osaka University. 1-7 Machikaneyama, Toyonaka, Osaka 560-0043, Japan;1. University of Eastern Piedmont and CeRP-Collegio Carlo Alberto, Italy;2. University of Turin and CeRP-Collegio Carlo Alberto, Italy;3. Commissione di Vigilanza sui Fondi Pensione, Italy |
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| Abstract: | 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. |
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| Keywords: | Insider trading Price efficiency Post-earnings announcement drift Predicting earnings G14 G38 M4 |
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