We provide evidence that insider trading contains value-relevant information by examining the association of insider trading with subsequent earnings changes and analysts' forecast revisions. Using a sample of 93,036 observations for 2,181 firms during 1986-1991, we document significant associations between insider trading and short (one-year-ahead) and longer term (two-and three-years-ahead) earnings changes, and between insider trading and analysts' forecast revisions, showing that insider trading contains value-relevant information. Our results also suggest that when insider trading is in the direction of the unexpected earnings news (i.e., insider purchases following good earnings news and sales following bad news), insiders may be acting on value-relevant private information. When insider trading is in a direction contrary to the earnings news, these trades appear to be motivated by the insiders' recognition of the market mispricing of their securities.
Get full access to this article
View all access options for this article.
References
1.
AbarbanellS. A.1991. “Do Analysts' Earnings Forecasts Incorporate Information in Prior Stock Price Changes?”Journal of Accounting and Economics14 (June): 147–165.
2.
AbarbanellS. A.BusheeB. J.. 1997. “Fundamental Analysis, Future Earnings, and Stock Prices.”Journal of Accounting Research (Spring): 1–24.
BarberB.LehavyR.McNicholsM.TruemanB.. 1998. “Can Investors Profit from the Prophets? Consensus Analysts Recommendations and Stock Returns.” Working paper, August.
5.
BarefieldR.ComiskeyE.. 1975. “The Accuracy of Analysts' Forecasts of Earnings Per Share.”Journal of Business Research (July): 241–252.
6.
BernardV.1995. “The Feltham-Ohlson Framework: Implications for Empiricists.”Contemporary Accounting Research (Spring): 733–747.
7.
BrownL.1993. “Earnings Forecasting Research: Its Implications for Capital Markets Research.”International Journal of Forecasting9: 295–320.
8.
BrownL. D.HagermanR. L.GriffinP. A.ZmijewskiM. E.. 1987. “Security Analyst Superiority Relative to Univariate Time-Series Models in Forecasting Quarterly Earnings.”Journal of Accounting and Economics9 (April): 61–87.
9.
BrownL. D.RozeffM. S.. 1979. “Univariate Time-Series Models of Quarterly Accounting Earnings Per Share: A Proposed Model.”Journal of Accounting Research17: 179–189.
10.
BrownP.FosterG.NoreenE.. 1985. “Security Analyst Multi-year Earnings Forecasts and the Capital Market,”Studies in Accounting Research21 (American Accounting Association, Sarasota, Fla.).
11.
CookT. J.RozeffM. S.. 1984. “Size and Earnings/Price Ratio Anomalies: One Effect or Two.”Journal of Financial and Quantitative Analysis19 (December): 449–466.
12.
ElliottJ.MorseD.RichardsonG.. 1984. “The Association Between Insider Trading and Information Announcements.”Rand Journal of Economics (Winter): 521–536.
13.
FinnertyJ.1976. “Insiders and Market Efficiency.”Journal of Finance (September): 1141–1148.
14.
FriedD.GivolyD.. 1982. “Financial Analysts' Forecast of Earnings: A Better Surrogate for Market Expectations.”Journal of Accounting and Economics4 (October): 85–107.
15.
GivolyD.LakonishokJ.. 1984. “The Quality of Analysts' Forecasts of Earnings.”Financial Analysts Journal (September-October): 40–47.
16.
GivolyD.PalmonD.. 1985. “Insider Trading and the Exploitation of Inside Information: Some Empirical Evidence.”Journal of Business (January): 69–87.
17.
ImhoffE. A.LoboG. J.. 1984. “Information Content of Analysts' Forecast Revisions.”Journal of Accounting Research (Autumn): 541–554.
18.
JaffeJ.1974a. “The Effect of Regulation Changes on Insider Trading.”Bell Journal of Economics and Management Science5 (Spring): 93–121.
19.
JaffeJ.1974b. “Special Information and Insider Trading.”Journal of Business (July): 410–428.
20.
LorieJ.NeiderhofferV.. 1968. “Predictive and Statistical Properties of Insider Trading.”Journal of Law and Economics (April): 35–51.
21.
LysT.SohnS.. 1990. “The Association between Revisions of Financial Analysts' Earnings Forecasts and Security-Price Changes.”Journal of Accounting and Economics13, (December): 341–363.
22.
MosesO. D.1990. “On Analysts' Earnings Forecasts for Failing Firms.”Journal of Business, Finance and Accounting17, no. 1 (Spring): 101–118.
23.
MosesO. D.1991. “Cash Flow Signals and Analysts' Earnings Forecast Revisions.”Journal of Business, Finance and Accounting18, no. 6 (November): 807–832.
24.
MuelbroekL. K.1992. “An Empirical Analysis of Illegal Insider Trading.”The Journal of Finance5 (December): 1661–1699.
25.
NetterJ. M.MitchellM. L.. 1989. “Stock-Repurchase Announcements and Insider Transactions After the October 1987 Stock Market Crash.”Financial Management (Autumn): 84–96.
26.
OhlsonJ.1995. “Earnings, Book Values and Dividends in Equity Valuation.”Contemporary Accounting Research11, no. 2, (Spring): 661–687.
27.
ParkS.JangH. J.LoebM. P.. 1995. “Insider Trading Activity Surrounding Annual Earnings Announcements.”Journal of Business Finance and Accounting22, no. 4 (June): 587–614.
28.
PenmanS. H.1982. “Insider Trading and Dissemination of Finns' Forecast Information.”Journal of Business55 (October): 92–116.
29.
PenmanS. H.1992a. “Return to Fundamentals.”Journal of Accounting, Auditing, and Finance7, no. 4 (Fall): 465–482.
30.
PenmanS. H.1992b. “Financial Statement Information and the Pricing of Earnings Changes.”Accounting Review (July): 563–577.
31.
PoundJ.1988. “The Information Effects of Takeover Bids and Resistance.”Journal of Financial Economics22 (December): 207–227.
32.
PrattS. P.DeVereC. W.. 1968. “Relationship between Insider Trading and Rates of Return for NYSE Common Stocks, 1960-66.” In LorieJ.BrealeyR. (eds.), Modern Developments in Investment Management, pp. 259–270, 2d. ed., Hinsdale, Ill.: Dryden.
33.
SeyhunN.1986. “Insiders' Profits, Costs of Trading, and Market Efficiency.”Journal of Financial Economics (June): 189–212.
34.
SeyhunN.1988. “The Information Content of Aggregate Insider Trading.”Journal of Business61, no. 1 (January): 1–24.
35.
SeyhunN. H.BradleyM.. 1997. “Corporate Bankruptcy and Insider Trading.”Journal of Business70, no. 2 (April): 189–216.
36.
SivakumarN.WaymireG.. 1994. “Insider Trading Following Material News Events: Evidence From Earnings.”Financial Management (Spring): 23–32.
37.
StaleyK. F.1997. The Art of Short Selling. New York: John Wiley & Sons.
