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http://ssrn.com/abstract=1928557
 
 

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Internal Control Over Financial Reporting and Managerial Rent Extraction: Evidence from the Profitability of Insider Trading


Hollis Ashbaugh Skaife


Graduate School of Management, UC-Davis; University of Wisconsin, Madison - Department of Accounting and Information Systems

David Veenman


Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Daniel Wangerin


Michigan State University


Journal of Accounting & Economics (JAE), Volume 55, Issue 1, February 2013, Pages 91–110

Abstract:     
This paper examines the association between ineffective internal control over financial reporting and the profitability of insider trading. We predict and find that the profitability of insider trading is significantly greater in firms disclosing material weaknesses in internal control relative to firms with effective control. The positive association is present in the years leading up to the disclosure of material weaknesses, but disappears after remediation of the internal control problems. We find insider trading profitability is even greater when insiders are more likely to act in their own self-interest as indicated by auditors’ weak “tone at the top” adverse internal control opinions and this incremental profitability is driven by insider selling. Our research identifies a new setting where shareholders are most at risk for wealth transfers via insider trading and highlights market consequences of weak “tone at the top”.

Number of Pages in PDF File: 50

Keywords: Insider trading, SOX 404, Internal control, Tone at the top, Management integrity, Management turnover

JEL Classification: D82, G14, G34, G38, M41

Accepted Paper Series


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Date posted: September 16, 2011 ; Last revised: March 3, 2013

Suggested Citation

Skaife, Hollis Ashbaugh and Veenman, David and Wangerin, Daniel, Internal Control Over Financial Reporting and Managerial Rent Extraction: Evidence from the Profitability of Insider Trading. Journal of Accounting & Economics (JAE), Volume 55, Issue 1, February 2013, Pages 91–110. Available at SSRN: http://ssrn.com/abstract=1928557 or http://dx.doi.org/10.2139/ssrn.1928557

Contact Information

Hollis Ashbaugh Skaife
Graduate School of Management, UC-Davis ( email )
Graduate School of Management
1 Shields Ave
Davis, CA 95616
United States
University of Wisconsin, Madison - Department of Accounting and Information Systems ( email )
School of Business
975 University Avenue
Madison, WI 53706
United States
608-263-7979 (Phone)
608-263-0477 (Fax)
David Veenman (Contact Author)
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )
P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
Daniel D. Wangerin
Michigan State University ( email )
270 North Business Complex
East Lansing, MI 48824-1034
United States
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