Unreported Insider Trades: Indicators of Future Earnings and Analyst Forecast Error

32 Pages Posted: 6 Jan 2013

See all articles by Millicent Chang

Millicent Chang

The University of Western Australia; University of Wollongong

Iain Watson

The University of Western Australia - Department of Accounting and Finance

Date Written: January 3, 2013

Abstract

We provide evidence of unreported trading by corporate insiders in their own firm’s shares and link this activity to future firm earnings and analyst forecast error. Unreported trading are cases of discrepancies between insider shareholdings from trades reported to the Exchange and their shareholdings disclosed in the firm’s annual report. Over the five year period from 2007 to 2011, the rate of unreported trading is 7.73%, being at its lowest in 2008 of 4.86% and peaking at 9.59% in 2011. Such activity is influenced by the firm’s growth opportunities and individual insider factors such as equity based compensation and also insider ownership in the firm. We separate unreported purchases from unreported sales due to the different motivations for buying and selling. Unreported purchases do not lead earnings increases though they indicate with analyst forecast error. On the other hand, unreported sales predict future decreases in up to two years’ earnings and are also related to forecast error. These findings suggest that insiders are aware of decreases in earnings and conceal their sales to profit from such information. Insiders also trade opportunistically on analyst forecast error.

Keywords: insider trading, future earnings, forecast error

JEL Classification: G14, G34, M41, M52

Suggested Citation

Chang, Millicent and Watson, Iain, Unreported Insider Trades: Indicators of Future Earnings and Analyst Forecast Error (January 3, 2013). Available at SSRN: https://ssrn.com/abstract=2196954 or http://dx.doi.org/10.2139/ssrn.2196954

Millicent Chang (Contact Author)

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
AUSTRALIA

University of Wollongong ( email )

Northfields Avenue
Wollongong, New South Wales 2522
Australia

Iain Watson

The University of Western Australia - Department of Accounting and Finance ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

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