Trades by Insiders and the Informativeness of Earnings Announcements

Abstract

Investors learn from trades by insiders about the next earnings announcement. By exploiting the discontinuity in the term structure of option prices on the announcement date, we show that this learning is nontrivial: the trades carry information about both the first and second moments of earnings. On the one hand, buys decrease earnings informativeness, on the other hand, sales increase it. Conversely, signals by analysts and 13D filers, who are also informed, unequivocally decrease earnings informativeness. The difference between insiders and other informed agents resides on their natural underdiversification, which incentivizes them to trade on the second moment.

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

JEL Classification: G14, G30, M41