Unreported Insider Trades: Indicators of Future Earnings and Forecast Error
33 Pages Posted: 27 Jan 2014
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: Suggested Citation