Disclosure of Financial Statement Line Items and Insider Trading Around Earnings Announcements

Abstract

This paper examines the relation between voluntary disclosure of financial statement line items accompanying, and insider trading around, quarterly earnings announcements. We find that investors’ reaction to positive earnings news is temporarily heightened by financial statement line items disclosed during earnings announcements. We show that managers, apparently aware of investors’ reaction, disclose more financial statement line items along with earnings and profitably trade shortly after earnings announcements. These results are more pronounced for CEO/CFO trades and opportunistic insider trades. Overall, our results are consistent with managers’ strategically disclosing line items to exploit the short-term return effect to their private benefit. We integrate three previously disparate phenomena – stock returns around earnings announcements, insider trading around earnings announcements, and voluntary disclosures around earnings announcements – into pieces of one mosaic.