Insider Trading Restrictions and Earnings Management

Accounting and Business Research, Forthcoming

56 Pages Posted: 31 Mar 2017 Last revised: 5 Jan 2020

See all articles by Beatriz Garcia Osma

Beatriz Garcia Osma

Universidad Carlos III de Madrid - Department of Business Administration

Elvira Scarlat

IE Business School, IE University

Karin Shields

University of London - Birkbeck College

Date Written: November 8, 2019

Abstract

We study whether firms that voluntarily restrict insider trading have lower incentives for earnings management. Using a large sample of US firms, we measure these restrictions based on the extent to which insider transactions happen shortly after quarterly earnings announcements. We find that the adoption of insider trading restrictions is associated with a reduction of 9.92 percent in absolute discretionary accruals. Our findings are robust to controlling for changes in corporate governance, and we do not find evidence of a substitution effect between accruals and real earnings management, target beating or timeliness of loss recognition. Taken together, our results indicate that the voluntary adoption of blackout periods that limit insider trading improves the quality of financial reporting.

Keywords: Insider trading, voluntary insider trading restrictions, earnings management, real earnings management, corporate governance

JEL Classification: G14, G34

Suggested Citation

Garcia Osma, Beatriz and Scarlat, Elvira and Shields, Karin, Insider Trading Restrictions and Earnings Management (November 8, 2019). Accounting and Business Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2943880 or http://dx.doi.org/10.2139/ssrn.2943880

Beatriz Garcia Osma

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Elvira Scarlat (Contact Author)

IE Business School, IE University ( email )

Calle Maria de Molina 12
Madrid, Madrid 28006
Spain

Karin Shields

University of London - Birkbeck College ( email )

Malet Street
London, London WC1
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
281
Abstract Views
1,553
rank
112,177
PlumX Metrics