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Opportunism as a Firm and Managerial Trait: Predicting Insider Trading Profits and Misconduct

81 Pages Posted: 24 Jul 2015 Last revised: 3 Jun 2017

Usman Ali

MIG Capital

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Date Written: August 30, 2016

Abstract

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

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

Usman Ali

MIG Capital ( email )

Newport Beach, CA 92660
United States

David A. Hirshleifer (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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