Unreported Insider Trades: Indicators of Future Earnings and Forecast Error

33 Pages Posted: 27 Jan 2014

See all articles by Millicent Chang

Millicent Chang

The University of Western Australia; University of Wollongong

Iain Watson

University of Queensland; Financial Research Network (FIRN)

Date Written: January 24, 2014


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 represent discrepancies between insider shareholdings from trades they report to the Exchange and their shareholdings as 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 factors such as equity related compensation and insider ownership. We separate unreported purchases from unreported sales due to the different motivations for buying and selling. Unreported purchases do not appear to lead earnings increases though they are able to predict forecast error. On the other hand, unreported sales predict future decreases in earnings for up to two years and are also related to forecast error. These findings suggest that insiders have foresight of decreases in earnings and conceal their sales to profit from such information, at the expense of other shareholders. They 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 Forecast Error (January 24, 2014). Available at SSRN: https://ssrn.com/abstract=2385078 or http://dx.doi.org/10.2139/ssrn.2385078

Millicent Chang (Contact Author)

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009

University of Wollongong ( email )

Northfields Avenue
Wollongong, New South Wales 2522

Iain Watson

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane

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