Earnings Valuation and Insider Trading

33 Pages Posted: 13 Sep 2007

See all articles by Wen Yu

Wen Yu

University of St. Thomas - Opus College of Business

Robert J. Bricker

Case Western Reserve University - Department of Accountancy

Date Written: September 12, 2007


This study explores insider trading as a function of differences between managers' and the market's assessment of company earning components - specifically operating cash flows and accruals. It extends prior research by more comprehensively studying earnings components. It also builds a perspective of managers as sophisticated investors who, while engaging in earnings management, ultimately make insider trading decisions based on the divergence between their private valuation of earnings components and the market's. Thus managers may, seemingly counter-intuitively, engage in income-increasing earnings management and insider buying in the same period. Using 4,357 recent firm - years of observations, we find strong evidence that insider buying, but not selling, behavior is consistent with managerial insider trading based on a market valuation divergence of both operating cash flows and accruals, rather than on either element individually, or on managers' use of accounting discretion. We apply the methodological framework of the Mishkin (1983) test to address the hypothesis above. In particular, we assess the relations involving market pricing and characteristics of company earnings and insider trading as these relate to the fundamental idea of market valuation divergence.

Keywords: insider trading, earnings, accruals, cash flows

JEL Classification: G12, M41, M43

Suggested Citation

Yu, Wen and Bricker, Robert J., Earnings Valuation and Insider Trading (September 12, 2007). Available at SSRN: https://ssrn.com/abstract=1014252 or http://dx.doi.org/10.2139/ssrn.1014252

Wen Yu (Contact Author)

University of St. Thomas - Opus College of Business ( email )

2115 Summit Avenue
St. Paul, MN 55105
United States
651-962-5428 (Phone)
651-962-5093 (Fax)

Robert J. Bricker

Case Western Reserve University - Department of Accountancy ( email )

Cleveland, OH 44106-7235
United States
(216) 368-5355 (Phone)
(216) 368-4776 (Fax)

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