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

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Detail(s)

Original languageEnglish
Article number107117
Journal / PublicationJournal of Accounting and Public Policy
Volume42
Issue number4
Online published21 Jul 2023
Publication statusPublished - Jul 2023

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. © 2023 Elsevier Inc.

Research Area(s)

  • Insider trading, Post-earnings announcement drift, Predicting earnings, Price efficiency

Citation Format(s)

Insider trading, future earnings, and post-earnings announcement drift. / Choi, Lyungmae; Faurel, Lucile; Hillegeist, Stephen A.
In: Journal of Accounting and Public Policy, Vol. 42, No. 4, 107117, 07.2023.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review