81 Pages Posted: 24 Jul 2015 Last revised: 3 Jun 2017
Date Written: August 30, 2016
We show that opportunistic insiders can be identified through the profitability of their trades prior to quarterly earnings announcements (QEAs), and that opportunistic trading is associated with various kinds of firm/managerial misconduct. A value-weighted trading strategy based on (not necessarily pre-QEA) trades of opportunistic insiders earns monthly 4-factor alphas of over 1% — much higher than in past insider trading literature and substantial/significant even on the short side. Firms with opportunistic insiders have higher levels of earnings management, restatements, SEC enforcement actions, shareholder litigation, and executive compensation. These findings suggest that opportunism is a domain-general trait.
Keywords: insider trading, managerial opportunism, managerial traits, misconduct, financial reporting, compensation
JEL Classification: G14, G34, G38, M12, M14, M41
Suggested Citation: Suggested Citation
Ali, Usman and Hirshleifer, David A., Opportunism as a Firm and Managerial Trait: Predicting Insider Trading Profits and Misconduct (August 30, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2635257 or http://dx.doi.org/10.2139/ssrn.2635257