Sell-Side Analyst Heterogeneity and Insider Trading

64 Pages Posted: 24 Sep 2019 Last revised: 9 Dec 2020

See all articles by Harold Contreras

Harold Contreras

Faculty of Economics and Business - University of Chile

Francisco Marcet

University of Chile- School of Economics and Business

Date Written: September 15, 2019

Abstract

This study explores insider trading patterns under different earnings surprises. After controlling for stock market liquidity and earnings announcements returns, we show that insiders sell more aggressively depending on the heterogeneity of analysts whose EPS forecasts are met or beaten to camouflage their trades. Specifically, insiders sell more shares of their company sooner after the publication of earnings when top analysts' forecasts are met or beaten. Consistent with the informed trading literature, insiders strategically select these moments because the stock price impact is low and the legal scrutiny of their trades is minimal. To support this result, we employ an exogenous drop in firms' analyst coverage due to the closure or merger of brokerage houses. Furthermore, in line with the camouflage incentives, by selling after top analysts' forecasts are met or beaten, stock prices adjust slowly to insider trades. Finally, we show that the incentives of insiders to hide their trades are concentrated in opportunistic insiders and members of the top management team, who are more likely to bear the costs of selling shares after positive news.

Keywords: Insider trading, Analysts' forecasts, Earnings announcements

JEL Classification: G14, G19, G39

Suggested Citation

Contreras, Harold and Marcet, Francisco, Sell-Side Analyst Heterogeneity and Insider Trading (September 15, 2019). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3454167 or http://dx.doi.org/10.2139/ssrn.3454167

Harold Contreras

Faculty of Economics and Business - University of Chile ( email )

Universidad de Chile
Diagonal Paraguay 257
Santiago
Chile

Francisco Marcet (Contact Author)

University of Chile- School of Economics and Business ( email )

Diagonal Paraguay 257
Floor 1003
Santiago, R. Metropolitana 7520421
Chile
+56-229783567 (Phone)

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