Insider Trading, Earnings Management and Information Asymmetry

Posted: 18 Mar 2015 Last revised: 4 Sep 2017

See all articles by Abu Zakir Md. Rasel Chowdhury

Abu Zakir Md. Rasel Chowdhury

Stockholm University

Sabur Mollah

Sheffield University Management School, University of Sheffield; Swansea Management School, Swansea University; Hull University Business School; Hull University Business School

Omar Al Farooque

University of New England (Australia) - UNE Business School

Date Written: January 5, 2015

Abstract

Insider trading is highly tied to earnings management in an asymmetric information environment. Using US data during 2004-2012 and different discretionary accrual measures, we reveal that insiders net purchase ratio dominated by sales, insider purchase ratio and cumulative abnormal return are positively associated with absolute value of earnings management (earnings quality). We also document high earnings management practice in growth firms (low book-to market) than value firms (high book-to market) as well as active involvement of major insiders (e.g. CEO) in such practice for personal benefits. A leading role of information asymmetry and its moderation effect is prevalent. Further evidence also suggests manipulation of earnings for insiders’ opportunistic trading over routine trading. Overseeing the earnings management and insider trading behavior simultaneously by the regulators is identified as an important policy issue in this research.

Keywords: insider trading, earnings management, earnings quality, information asymmetry, opportunistic and routine trading

Suggested Citation

Rasel Chowdhury, Abu Zakir Md. and Mollah, Sabur and Farooque, Omar Al, Insider Trading, Earnings Management and Information Asymmetry (January 5, 2015). British Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2579295 or http://dx.doi.org/10.2139/ssrn.2579295

Abu Zakir Md. Rasel Chowdhury

Stockholm University ( email )

Kräftriket 3A
Stockholm Business School
Stockholm, --Select-- 106 91
Sweden

Sabur Mollah (Contact Author)

Sheffield University Management School, University of Sheffield ( email )

Conduit Road
Sheffield, Sheffield S10 1FL
United Kingdom

Swansea Management School, Swansea University ( email )

Singleton Park
Swansea, Wales SA2 8PP
United Kingdom

Hull University Business School ( email )

Cottingham Road
Hull, Great Britain HU6 7RX
United Kingdom

Hull University Business School ( email )

Cottingham Road
Hull, Hull HU6 7RX
United Kingdom

Omar Al Farooque

University of New England (Australia) - UNE Business School ( email )

Armidale, NSW 2351
Australia

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