Insider Selling, Earnings Management, and the 1990s Bubble

57 Pages Posted: 30 Jun 2006 Last revised: 29 Jun 2014

See all articles by Steven J. Huddart

Steven J. Huddart

Pennsylvania State University, University Park - Department of Accounting

Henock Louis

Pennsylvania State University - Smeal College of Business

Date Written: April 27, 2011

Abstract

Large equity grants, the hallmark of 1990s executive compensation, allegedly contributed to the 1990s stock bubble by making managers especially sensitive to stock performance and leading them to inflate earnings. Regarding these heretofore untested claims, we show that earnings are inflated before insiders sell stock, and both insider selling and earnings management surged during the bubble. Furthermore, a firm’s return over the 30 months after the market’s peak is negatively associated with its cumulative abnormal accruals during the bubble. More specifically, firms in the top quartile of abnormal accruals during the bubble experience an average monthly stock price correction of about –1.44% (i.e., an average cumulative abnormal return of about −35.4%) over the 30 months of the correction period, relative to a benchmark portfolio of firms matched on size, book-to-market, and return momentum. Moreover, the association between abnormal accruals and post-bubble abnormal returns is significantly stronger for firms whose insiders were stock sellers during the bubble than for firms whose insiders were buyers.

Keywords: equity incentives, insider trading, financial reporting, smoothing

JEL Classification: G32, J33, K22, M41

Suggested Citation

Huddart, Steven J. and Louis, Henock, Insider Selling, Earnings Management, and the 1990s Bubble (April 27, 2011). Available at SSRN: https://ssrn.com/abstract=912214 or http://dx.doi.org/10.2139/ssrn.912214

Steven J. Huddart

Pennsylvania State University, University Park - Department of Accounting ( email )

University Park, PA 16802-3603
United States
814-863-0448 (Phone)

HOME PAGE: http://directory.smeal.psu.edu/sjh11

Henock Louis (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802-3306
United States
814-865-4160 (Phone)
814-863-8393 (Fax)

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