What are Insider Trades Around Profit Warnings Really Telling Us?

19 Pages Posted: 12 Jan 2007

See all articles by Millicent Chang

Millicent Chang

The University of Western Australia; University of Wollongong

Iain Watson

The University of Western Australia - Department of Accounting and Finance

Date Written: January 11, 2007

Abstract

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

Chang, Millicent and Watson, Iain, What are Insider Trades Around Profit Warnings Really Telling Us? (January 11, 2007). Available at SSRN: https://ssrn.com/abstract=956534 or http://dx.doi.org/10.2139/ssrn.956534

Millicent Chang (Contact Author)

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
AUSTRALIA

University of Wollongong ( email )

Northfields Avenue
Wollongong, New South Wales 2522
Australia

Iain Watson

The University of Western Australia - Department of Accounting and Finance ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

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