SEC Comment Letters and Insider Sales

67 Pages Posted: 7 Oct 2013 Last revised: 26 Mar 2016

See all articles by Patricia M. Dechow

Patricia M. Dechow

University of Southern California - Leventhal School of Accounting; University of California, Berkeley - Accounting Group

Alastair Lawrence

London Business School / University of California, Berkeley

James Ryans

London Business School

Date Written: June 26, 2015

Abstract

We document that insider trading is significantly higher than normal levels prior to the public disclosure of SEC comment letters relating to revenue recognition. Furthermore, insider trading is triple its normal level for firms with high short positions. We find a small negative return at the comment letter release date and a negative drift in returns of one to five percent over the next 50 days following the release. We also find that greater pre-disclosure sales are associated with a stronger negative drift. This evidence suggests that insiders appear to benefit from trading prior to revenue recognition comment letters. We investigate whether the delayed price reaction to comment letter releases is due to investor inattention. Consistent with this explanation, we document that comment letters are downloaded infrequently from EDGAR in the days following their public disclosure.

Keywords: SEC comment letters, insider trading, revenue recognition, investor inattention, financial disclosure, EDGAR downloads, short sellers.

JEL Classification: M41, M48, K42

Suggested Citation

Dechow, Patricia M. and Lawrence, Alastair and Ryans, James, SEC Comment Letters and Insider Sales (June 26, 2015). Accounting Review Vol. 91. No. 2, 2016. Available at SSRN: https://ssrn.com/abstract=2336812 or http://dx.doi.org/10.2139/ssrn.2336812

Patricia M. Dechow

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

University of California, Berkeley - Accounting Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

Alastair Lawrence (Contact Author)

London Business School / University of California, Berkeley ( email )

Regent's Park
London
United Kingdom

HOME PAGE: http://Www.alastairlawrence.net

James Ryans

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

HOME PAGE: http://www.london.edu

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