What are Insider Trades Around Profit Warnings Really Telling Us?
19 Pages Posted: 12 Jan 2007
Date Written: January 11, 2007
In this paper, we investigate insider trading activity around profit warnings. We conjecture that since firms are required to release price sensitive information, such as in the form of profit warnings, to ensure that investors are continually informed of changes in performance and future prospects, insiders time their trades to maximise personal gains. Our results show that in the six months leading up to the warning, there is a decrease in share price that continues after the warning. Insiders take advantage of the situation by increasing their holdings in the pre-warning period and continue buying, though to a less extent after the warning's release. The findings indicate that profit warnings signal poorer though temporary financial performance and insiders profit from this knowledge.
Keywords: insider trading, profit warnings
JEL Classification: M41, M45, G34
Suggested Citation: Suggested Citation