Delayed disclosure of insider trades: Incentives for and indicators of future performance?

Abstract

We investigate incidences of delayed disclosure of trading by corporate insiders (directors) in Australian firms and link this activity to personal wealth incentives and f uture firm performance. Delayed disclosure represents discrepancies in timing between trades reported as they occur and trades as disclosed in the firm's annual report. Over the period from 2007 to 2011, the rate of late reported trading was about 6%, being at its lowest in 2010 at 5.3% and peaking at 6.8% in 2007. The rate of delayed disclosed purchases was higher than the rate of sales. The likelihood of delayed disclosure was affected by insider wealth factors such as total compensation levels, equity compensation, and shareholdings and their positions within the firm. When executive and nonexecutive directors in small firms delayed the reporting of their purchases, these purchases signaled positive future returns. In large firms, only executive directors' sales were indicative of one year ahead negative returns. These findings suggest that delayed disclosed trades have information content about future firm performance and compensation structures influence the decisions by some insiders to engage in such activity for personal gain.