Do Insiders Trade on Mispricing After Earnings Announcements?

37 Pages Posted: 9 Jun 2014 Last revised: 21 Jan 2016

See all articles by Jana P. Fidrmuc

Jana P. Fidrmuc

Warwick Business School - Finance Group

Jiri Novak

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic

Harold Contreras

Faculty of Economics and Business - University of Chile

Date Written: November 20, 2015

Abstract

This paper conjectures that insiders exploit their stock's mispricing after earnings announcements to make profitable trades. We design two sets of tests to provide evidence of insider trading on mispricing of their stock. First, insiders' purchases and sales are profitable both after positive and negative earnings surprises, which indicates that their trading strategies are superior to simple contrarian or momentum trading strategies. Second, we estimate a model of 'normal' market reaction to an earnings announcement and use the deviation of the fitted value from the realized market reaction as our measure of mispricing after earnings announcements. In line with the mispricing hypothesis, we show that insiders sell (buy) more often after large positive (negative) values of our mispricing measure and earn significant post trading returns.

Keywords: Insider trading, Contrarian trading, Earnings announcements, Mispricing

JEL Classification: G14, G19, G39

Suggested Citation

Fidrmuc, Jana P. and Novak, Jiri and Contreras, Harold, Do Insiders Trade on Mispricing After Earnings Announcements? (November 20, 2015). Available at SSRN: https://ssrn.com/abstract=2447649 or http://dx.doi.org/10.2139/ssrn.2447649

Jana P. Fidrmuc (Contact Author)

Warwick Business School - Finance Group ( email )

Warwick Business School
Coventry CV4 7AL
United Kingdom

Jiri Novak

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic ( email )

Opletalova 1606/26
Praha 1, 11000
Czech Republic
+420 222 112 314 (Phone)

HOME PAGE: http://ies.fsv.cuni.cz/cs/staff/novakji

Harold Contreras

Faculty of Economics and Business - University of Chile ( email )

Universidad de Chile
Diagonal Paraguay 257
Santiago
Chile

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