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Insider Trading and Voluntary Disclosures

Qiang Cheng

Singapore Management University

Kin Lo

University of British Columbia (UBC) - Sauder School of Business

May 2006

Sauder School of Business Working Paper
Journal of Accounting Research, Forthcoming

We hypothesize that insiders strategically choose disclosure policies and the timing of their equity trades to maximize trading profits, subject to the litigation costs associated with disclosure and insider trading. Accounting for endogeneity between disclosures and trading, we find that when managers plan to purchase shares, they increase the number of bad news forecasts to reduce the purchase price. In addition, this relation is stronger for trades initiated by chief executive officers than those initiated by other executives. Confirming this strategic behavior, we find that managers successfully time their trades around bad news forecasts, buying fewer shares beforehand and more afterwards. We do not find that managers adjust their forecasting activity when they are selling shares, consistent with higher litigation concerns associated with insider sales. Overall, our evidence suggests that insiders do exploit voluntary disclosure opportunities for personal gain, but only selectively, when litigation risk is sufficiently low.

Number of Pages in PDF File: 51

Keywords: Voluntary Disclosure, Management Forecasts, Insider Trading

JEL Classification: G30, K22, M40

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Date posted: March 1, 2004 ; Last revised: April 16, 2013

Suggested Citation

Cheng, Qiang and Lo, Kin, Insider Trading and Voluntary Disclosures (May 2006). Sauder School of Business Working Paper; Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=510842 or http://dx.doi.org/10.2139/ssrn.510842

Contact Information

Qiang Cheng (Contact Author)
Singapore Management University ( email )
60 Stamford Road
Singapore, 178900

Kin Lo
University of British Columbia (UBC) - Sauder School of Business ( email )
2053 Main Mall
Vancouver, BC V6T 1Z2
604-822-8430 (Phone)
604-822-9470 (Fax)
HOME PAGE: http://www.sauder.ubc.ca/faculty/directory/faculty/lo.cfm
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