Insider Trading, Future Earnings and Post-Earnings Announcement Drift
53 Pages Posted: 29 Jun 2016 Last revised: 7 Mar 2019
Date Written: March 5, 2019
This paper examines the association between insider trading preceding the earnings announcement and the magnitude of the post-earnings announcement drift (PEAD). Consistent with insiders’ private information being incorporated into prices through their trading, we find PEAD is significantly lower when earnings announcements are preceded by insider trading. In cross-sectional analyses, the negative association between insider trading and PEAD is stronger when insider trades are more likely to be based on private information. Further analyses indicate trades reflect insiders’ private information about the persistence of earnings surprises. Consistent with investors extracting this private information, prior insider trading is associated with smaller market reactions to future earnings surprises. Overall, our findings indicate insider trading contributes to stock price efficiency by conveying insiders’ private information, including private information about future earnings, to the market. Taken together, our results suggest investors use the information conveyed by insider trading to help interpret and more accurately price current earnings news.
Keywords: insider trading; price efficiency; post-earnings announcement drift; predicting earnings
JEL Classification: G14, G38, M4
Suggested Citation: Suggested Citation