Insider Trading and Incentives to Manage Earnings

52 Pages Posted: 6 Feb 2004

See all articles by Messod Daniel Beneish

Messod Daniel Beneish

Indiana University - Kelley School of Business - Department of Accounting

Eric Press

Temple University - Department of Accounting

Mark E. Vargus

University of Texas at Dallas - Department of Accounting & Information Management

Date Written: January 24, 2004

Abstract

This paper evaluates two hypotheses about the relation between insider selling and earnings management in periods preceding poor corporate performance. Consistent with our litigation avoidance hypothesis, we provide evidence that managers manage earnings upwards after they have engaged in abnormally high levels of insider selling. In contrast, we find no support for the pump and dump hypothesis of earnings being managed before managers sell their equity. Our findings indicate insider trading provides managers with incentives to subsequently manage earnings upward, to distance their selling from the revelation of bad news and reduce the likelihood of reputation, employment, and litigation losses. We show these incentives co-exist and complement incentives to avoid default in a sample of 462 firms that experience technical default in 1983-1997. Our findings suggest that investors and those with oversight authority (e.g., boards of directors, auditors, and regulators) consider monitoring prior rather than contemporaneous insider-trading activity as a part of their corporate governance practices.

Keywords: Insider trading, litigation avoidance, pump and dump, earnings management

JEL Classification: G34, G33, K22, M41, M43

Suggested Citation

Beneish, Messod Daniel and Press, Eric G. and Vargus, Mark E., Insider Trading and Incentives to Manage Earnings (January 24, 2004). Available at SSRN: https://ssrn.com/abstract=495862 or http://dx.doi.org/10.2139/ssrn.495862

Messod Daniel Beneish

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2628 (Phone)
812-855-4985 (Fax)

Eric G. Press (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215-204-8127 (Phone)
215-204-5587 (Fax)

HOME PAGE: http://oll.temple.edu/epress/

Mark E. Vargus

University of Texas at Dallas - Department of Accounting & Information Management ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States
972-883-4772 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
1,157
Abstract Views
4,587
rank
17,425
PlumX Metrics