Does Insider Trading Activity Separate Winners and Losers when a Peer Firm Restates?

57 Pages Posted: 1 Oct 2016 Last revised: 26 Oct 2021

See all articles by Terrence Blackburne

Terrence Blackburne

Oregon State University

Asher Curtis

University of Washington; Department of Accounting

Anna Rossi

University of Oulu - Department of Economics, Accounting and Finance

Date Written: October 25, 2021

Abstract

Peer restatements are an ambiguous signal for investors following non-restating firms in the same industry. The literature, however, consistently documents that non-restating firms experience negative returns when a peer restates, on average. Based on a simple single agent model, we predict that prior insider trading activity provides information that investors use to condition their response to a peer-firm restatement. Consistent with our prediction, we find that the negative returns for non-restating firms are mitigated when insiders have been buying and amplified when insiders have been selling. The effect varies cross-sectionally with more weight being placed on prior insider trading activities when non-restating firms have higher information uncertainty, lower costs of biased reporting, or operate in less-concentrated industries. Finally, we report evidence that recent insider trades prior to a peer restatement help investors correctly interpret implications of the peer restatement for future outcomes of the non-restating firm.

Keywords: Insider Trading; Restatements; Disclosure; Information Transfer; Contagion

JEL Classification: G14; M41

Suggested Citation

Blackburne, Terrence and Curtis, Asher and Rossi, Anna, Does Insider Trading Activity Separate Winners and Losers when a Peer Firm Restates? (October 25, 2021). Available at SSRN: https://ssrn.com/abstract=2846132 or http://dx.doi.org/10.2139/ssrn.2846132

Terrence Blackburne

Oregon State University ( email )

Corvallis, OR 97331
United States

Asher Curtis (Contact Author)

University of Washington ( email )

Seattle, WA 98195
United States

Department of Accounting ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States

Anna Rossi

University of Oulu - Department of Economics, Accounting and Finance ( email )

PO Box 4600
FIN-90014
Finland

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