Trades by Insiders and the Informativeness of Earnings Announcements

Abstract

Do insiders trade on private information about earnings news? We address this question by exploiting the discontinuity in the term structure of options around earnings announcements, to obtain a daily, forward-looking measure of the informativeness of the next earnings announcement. This measure reveals two trading motives: purchases decrease the informativeness, suggesting that insiders trade on the earnings realization. Sales increase the informativeness, indicating that insiders use information about the variance. The positive relation is more pronounced for officers and directors and absent in signals by analysts or activist shareholders, who possess private information but are better diversified.

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

JEL Classification: G14, G30, M41