Do Insider Trades Reflect Superior Knowledge About Future Cash Flow Realizations?

University of Chicago Graduate School of Business Working Paper

41 Pages Posted: 5 Feb 2003

See all articles by Joseph D. Piotroski

Joseph D. Piotroski

Stanford Graduate School of Business

Darren T. Roulstone

Ohio State University (OSU) - Fisher College of Business

Date Written: January 2003

Abstract

This paper examines whether insider trades reflect the insiders' superior knowledge of future cash flow realizations, as proxied by the firm's future return and earnings performance. We find strong evidence that insider trades are positively associated with the firm's future earnings performance. This relation is shown to be incremental to the book-to-market and past return relations documented in Rozeff and Zaman (1998), suggesting that insiders trade on both transitory security misvaluation and private information about future cash-flow payoffs. We find that insider trading behavior within each book-to-market portfolio varies with the horizon of the subsequent earnings news. Insider purchases are significantly positively related to next year's earnings news across all book-to-market portfolios, while the sign of the relation between insider purchases and contemporaneous earnings is negative (positive) for glamour (value) firms. Finally, we show that the relation between insider trades and future earnings performance is amplified (attenuated) as the likely ex ante benefits (costs) to trading on financial performance information increase.

Keywords: Insider trading, Informativeness of Earnings, Capital Markets

JEL Classification: M41, G14, G28

Suggested Citation

Piotroski, Joseph D. and Roulstone, Darren T., Do Insider Trades Reflect Superior Knowledge About Future Cash Flow Realizations? (January 2003). University of Chicago Graduate School of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=372180 or http://dx.doi.org/10.2139/ssrn.372180

Joseph D. Piotroski (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Darren T. Roulstone

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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