INSIDER TRADING FOLLOWING MATERIAL NEWS EVENTS - EVIDENCE FROM EARNINGS

Trading by corporate insiders has been a significant public policy issue in the United States for the past several decades. Despite a series of laws and prohibitions against trading by insiders on material non-public information, the academic literature unambiguously suggests that insiders earn abnormal profits on their stock transactions. In general, the literature suggests that purchases (sales) by insiders are followed by positive (negative) abnormal stock returns. Because ordinary investors may benefit from knowledge of insider trading activity, the financial press and investment analysts frequently provide information on recent insider trades. A recent trend emerging from both actions by regulatory authorities and companies is the use of policies that restrict insider trading to time periods following regular news announcements. Several companies have adopted policies (with the SEC's approval) that limit insider transactions to the period immediately after disclosure of the quarterly earnings report. Presumably, the intended effect of such policies is to equalize access to information between insiders and external investors and ensure that the firm's officers comply with insider trading laws. We provide evidence on the incidence and profitability of insider trading following quarterly earnings announcements. If policies to restrict insider trading to the post-earnings disclosure period induce insiders to delay what otherwise would be profitable trades, we would expect: (1) the incidence of insider trading will increase after quarterly earnings disclosure; (2) post-announcement insider purchases (sales) will be preceded by positive (negative) abnormal returns, consistent with foregone trading profits; and (3) no systematic abnormal returns will follow these trades if public disclosure erodes any informational advantage possessed by insiders. Our analysis indicates that insider trading increases immediately after quarterly earning disclosure, but these trades are not associated with foregone trading profits. Consistent with this finding, there is no positive association between post-earnings disclosure insider positions and earnings forecast errors, as would be expected if insiders delayed purchases (sales) prior to positive (negative) earnings news. Our evidence also indicates that a substantial number of insiders buy (sell) after unfavorable (favorable) earnings news, suggesting that insider trading actions incorporate information not revealed by earnings announcements. We also find that post-earnings disclosure trades are associated with significant abnormal returns following trade execution. Overall, our analyses suggest that stock price behavior associated with insider trades following earnings announcements is not substantively different from the results documented in numerous prior studies using broader samples of insider trades. These results suggest that policies limiting periods of acceptable insider trading likely after when trades occur, but they do not eliminate insider trading profits. These policies also do not appear to impose significant opportunity costs in terms of foregone trading profits for insider trades actually executed. This conclusion, however, is conditional since we cannot observe the effects of such policies on insider trades that could have been executed but were not.