Insider Trading, Future Earnings and Post-Earnings Announcement Drift

58 Pages Posted: 29 Jun 2016 Last revised: 10 Oct 2019

See all articles by Lyungmae Choi

Lyungmae Choi

City University of Hong Kong (CityUHK)

Lucile Faurel

Arizona State University

Stephen A. Hillegeist

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy

Date Written: October 9, 2019

Abstract

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

Choi, Lyungmae and Faurel, Lucile and Hillegeist, Stephen A., Insider Trading, Future Earnings and Post-Earnings Announcement Drift (October 9, 2019). Available at SSRN: https://ssrn.com/abstract=2801411 or http://dx.doi.org/10.2139/ssrn.2801411

Lyungmae Choi

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Lucile Faurel (Contact Author)

Arizona State University ( email )

W.P. Carey School of Business
School of Accountancy, B267H
Tempe, AZ 85287
United States
(480) 965-6216 (Phone)

Stephen A. Hillegeist

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy ( email )

Tempe, AZ 85287-3706
United States
480-965-6614 (Phone)

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