Trades by Insiders and the Informativeness of Earnings Announcements

41 Pages Posted: 15 Apr 2020 Last revised: 8 Sep 2020

See all articles by Julio A. Crego

Julio A. Crego

Tilburg University

Jasmin Gider

Tilburg University - Tilburg University School of Economics and Management

Date Written: September 7, 2020

Abstract

Do insiders trade on private information about earnings? We address this question exploiting the discontinuity in the term structure of option prices around the announcement date, to obtain a daily and forward-looking measure of the informativeness of the next earnings announcement. This measure reveals two distinct trading motives related to the next earnings announcement. On the one hand, purchases by insiders decrease the informativeness of the subsequent earning announcement, suggesting that they trade on the earnings realization. On the other hand, sales increase the informativeness of earnings announcements. This result implies that insiders respond to an increase of earnings uncertainty, thereby using information about the variance when trading. The typical underdiversification of insiders drives this finding, as the positive relation is unique to officers and directors, and stronger in firms facing higher idiosyncratic uncertainty. The positive effect of sales is absent in signals by analysts or large outside shareholders, who possess private information but are better diversified.

Keywords: Insider Trading, Informed Trading, Public Information, Earnings Announcements

JEL Classification: G14, G30, M41

Suggested Citation

Crego, Julio and Gider, Jasmin, Trades by Insiders and the Informativeness of Earnings Announcements (September 7, 2020). Available at SSRN: https://ssrn.com/abstract=3561462 or http://dx.doi.org/10.2139/ssrn.3561462

Julio Crego

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Jasmin Gider (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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