Insider Trading Before Accounting Scandals

57 Pages Posted: 16 Apr 2008 Last revised: 2 Sep 2015

Anup Agrawal

University of Alabama - Culverhouse College of Commerce & Business Administration

Tommy Cooper

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: July 1, 2015

Abstract

We examine insider trading in a sample of more than 500 firms involved in accounting scandals revealed by earnings-decreasing restatements, and in a control sample of non-restating firms. Managers who sell stock while earnings are misstated potentially commit two crimes, earnings manipulation and insider trading, and their selling increases investor scrutiny and the likelihood of the manipulation being revealed. We examine the purchases, sales and net sales of five groups of corporate insiders during the misstated period and a pre-misstated period, using a difference-in-differences approach. Using several measures of the level of insider trading, we estimate cross-sectional regressions that control for other determinants of the level of insider trading. For the full sample of restating firms, we find weak evidence that top managers of misstating firms sell more stock during the misstated period than during the pre-misstated period, relative to the control sample. But in a number of subsamples where insiders had greater incentives to sell before the revelation of accounting problems, we find strong evidence that top managers of restating firms sell substantially more stock during the misstated period. These findings suggest that managers’ desire to sell their stockholdings at inflated prices is a motive for earnings manipulation. Our finding that insiders brazenly trade on a crime for which they are potentially culpable suggests that insider trading is more widespread in the market than has been found in the prior literature.

Keywords: Insider trading, Earnings manipulation, Accounting scandals, Financial restatements, Earnings restatements, Corporate crime

JEL Classification: G14, K22, M43

Suggested Citation

Agrawal, Anup and Cooper, Tommy, Insider Trading Before Accounting Scandals (July 1, 2015). Forthcoming, Journal of Corporate Finance, 2015. Available at SSRN: https://ssrn.com/abstract=929413 or http://dx.doi.org/10.2139/ssrn.929413

Anup Agrawal (Contact Author)

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Commerce
EFLS, Box 870224
Tuscaloosa, AL 35487-0224
United States
205-348-8970 (Phone)
205-348-0590 (Fax)

HOME PAGE: http://culverhouse.ua.edu/faculty/profile/4

Tommy Cooper

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

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