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The effect of insider trading on the stock price response to earnings
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The effect of insider trading on the stock price response to earnings
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The effect of insider trading on the stock price response to earnings
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Dissertation
The effect of insider trading on the stock price response to earnings
1990
Overview
In this paper, I examine the impact of insider trading prior to an earnings announcement on the stock price response to earnings. The hypothesis is that insider trading prior to an earnings announcement might provide an additional source of predisclosure information to market participants to make inferences about forthcoming earnings. If so, I expect the stock price response to earnings announcements of firms whose earnings announcements are preceded by insider trading to be smaller compared with that of firms whose earnings announcements are not preceded by insider trading. I use two metrics to examine the impact of insider trading on the stock price response to earnings--earnings response coefficient (the coefficient mapping unexpected earnings into security returns around quarterly earnings announcements (denoted ERC)) and a measure of the variance of returns. The ERC is estimated for the period 1980-1984 as a coefficient from a regression of returns on unexpected earnings using the seemingly unrelated regression (SUR) methodology. Insider trading is incorporated into the empirical model as a dummy variable which equals one when there is insider trading and zero otherwise. The stock return variance measure is computed by deflating the cumulated squared two-day announcement returns by an estimate of the variance of returns from the period prior to the earnings announcement. I classify firms into portfolios for each quarter from 1980-1984 based on the sign of the earnings surprise ( (Actual EPS - Forecast EPS) $\\sbsp{<}{>}$ 0) and the direction of insider trading (Purchases $\\sbsp{<}{>}$ Sales). Briefly, my results provide evidence in support of the hypothesis that insider trading prior to an earnings announcement provides additional interim information about a firm's forthcoming earnings.
