The Credibility of Voluntary Disclosure and Insider Stock Transactions

40 Pages Posted: 11 Dec 2007

See all articles by Feng Gu

Feng Gu

State University of New York at Buffalo

John Q. Li

Suffolk University - Sawyer School of Management

Abstract

We examine stock price reaction to voluntary disclosure of innovation strategy by high-tech firms and its relation with insider stock transactions before the disclosure. We find that, despite the qualitative and subjective nature of strategy-related disclosure, there is positive stock price reaction to the disclosure. The evidence suggests that investors view the disclosure as credible good news. We also find that the disclosure is associated with more positive stock price reaction when it is preceded by insider purchase transactions. This evidence is consistent with insider purchase enhancing the credibility of the disclosure. The credibility-enhancing effect is found to be stronger for firms with higher degrees of information asymmetry (younger firms, firms with lower analyst following, loss firms, and firms with higher research and development (R&D) intensity). Our evidence also indicates that predisclosure insider purchase is associated with greater future abnormal returns, suggesting that managers are privy to good news shortly before the disclosure.

Suggested Citation

Gu, Feng and Li, John Q., The Credibility of Voluntary Disclosure and Insider Stock Transactions. Journal of Accounting Research, Vol. 45, No. 4, pp. 771-810, September 2007. Available at SSRN: https://ssrn.com/abstract=1065883 or http://dx.doi.org/10.1111/j.1475-679X.2007.00250.x

Feng Gu (Contact Author)

State University of New York at Buffalo ( email )

12 Capen Hall
School of Management
Buffalo, NY 14221

John Q. Li

Suffolk University - Sawyer School of Management ( email )

8 Ashburton Place
Beacon Hill
Boston, MA 02108-2770
617-305-1704 (Phone)
617-573-8345 (Fax)

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