The Factors Affecting Illegal Insider Trading in Firms with Violations of GAAP

Abstract:     
Consistent with the economics of crime approach, this paper finds that insider selling is decreasing in the perceived costs of potential private and public enforcement upon discovery of GAAP misstatements, and increasing in managerial private benefits as measured by the market reaction to the misstatement announcement. Additionally, insiders at fraud firms sell more on average, although the intensity of their trades is less likely to be associated with the magnitude of their private information. Further analysis suggests that managers perceive a higher cost of public enforcement in the post-Enron period.

Keywords: economics of crime, insider trading, enforcement risk, restatements, fraud

JEL Classification: K22, M41

Accepted Paper Series