Effects of Legal Environment and Managerial Ownership on Insider Trading Around Management Earnings Forecast Disclosures

Posted: 17 Jun 1996

See all articles by Youngsoon Susan Cheon

Youngsoon Susan Cheon

Chung-Ang University - College of Business Administration

Date Written: Undated

Abstract

This study investigates whether insiders who possess superior information to outsiders behave as if they time their trading around management forecast disclosures in order to earn extra profits. In the 1980s, Congress passed the Insider Trading Sanctions Act (ITSA) of 1984 and the Insider Trading and Securities Fraud Enforcement Act (ITSFA) of 1988 to prohibit illegal insider trading. Hence, this study further examines whether passage of the 1984 and 1988 Acts affect timing and pattern of insider trading around management forecast disclosures. Finally, the study investigates whether managerial ownership affects insider trading behavior around management forecast disclosures. This study finds evidence consistent with opportunistic i nsider trading. The 1984 ITSA appears to affect sell-side insider trading by reducing pre-disclosure purchase/sale transactions and self-serving sale trading volume. In contrast, pre-disclosure purchase trading increased after the 1988 Act. There is evidence that insider ownership affects the timing of insider trading. Insiders with low ownership are likely to buy after management forecast disclosures, while insiders with high ownership tend to buy before the forecast disclosures. Results, however, suggest that insiders with higher stakes do not necessarily trade more opportunistically than those with low ownership.

JEL Classification: G12. G18, M41, M45

Suggested Citation

Cheon, Youngsoon Susan, Effects of Legal Environment and Managerial Ownership on Insider Trading Around Management Earnings Forecast Disclosures (Undated). Available at SSRN: https://ssrn.com/abstract=2650

Youngsoon Susan Cheon (Contact Author)

Chung-Ang University - College of Business Administration ( email )

221 Hukseuk-Dong
Department of Accounting
Seoul 156-756
Korea
822-820-5522 (Phone)
822-813-8910 (Fax)

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