Disclosures of Insider Purchases and the Valuation Implications of Past Earnings Signals

Abstract:     
This study examines whether disclosures of insider equity purchases on SEC Form 4 resolve uncertainty regarding the valuation implications of reported earnings. Defining information uncertainty as ambiguity about firm value arising from low earnings precision, I predict and find that insider purchase filings trigger more positive market reactions in firms with greater information uncertainty (lower quality accruals). After controlling for future earnings changes, I further find that market reactions to purchase filings are predictably associated with prior earnings changes. The strength of this effect is increasing in the magnitude of insider purchases as well as the level of information uncertainty. Overall, these findings suggest that, in addition to signaling future earnings information, Form 4 purchase filings help investors learn about the valuation implications of past earnings signals.

Number of Pages in PDF File: 49

Keywords: insider trading, uncertainty, accruals quality, persistence

JEL Classification: D82, G14, M41

Accepted Paper Series