Financial Restatement Announcements and Insider Trading

47 Pages Posted: 12 Sep 2006

See all articles by Oliver Zhen Li

Oliver Zhen Li

National University of Singapore (NUS)

Yuan Zhang

University of Texas at Dallas

Date Written: October 2006

Abstract

We examine insider trading activities around financial restatement announcements and find strong evidence of informed trading by insiders. Focusing on the association between net insider selling and restatement announcement abnormal returns, we provide evidence of net insider selling before the restatement announcements, little net insider selling immediately around the announcements, and net insider buying after the announcements. The passage of the Sarbanes-Oxley Act constrains informed insider selling before the restatement announcements. Trading before the restatement announcements enables insiders to make a significant profit, especially pre-Sarbanes-Oxley. Overall, our results suggest that insiders trade on privileged knowledge about the forthcoming restatement announcements to their advantage and that they trade in a pattern that minimizes the possibility of insider trading allegations or violating internal corporate insider trading policies.

JEL Classification: M41, M45, G12, G14, G38, D82

Suggested Citation

Li, Oliver Zhen and Zhang, Yuan, Financial Restatement Announcements and Insider Trading (October 2006). Available at SSRN: https://ssrn.com/abstract=929539 or http://dx.doi.org/10.2139/ssrn.929539

Oliver Zhen Li (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Yuan Zhang

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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