Abstract
This paper examines whether insider trades reflect the insiders' superior knowledge of future cash flow realizations, as proxied by the firm's future return and earnings performance. We find strong evidence that insider trades are positively associated with the firm's future earnings performance. This relation is shown to be incremental to the book-to-market and past return relations documented in Rozeff and Zaman (1998), suggesting that insiders trade on both transitory security misvaluation and private information about future cash-flow payoffs. We find that insider trading behavior within each book-to-market portfolio varies with the horizon of the subsequent earnings news. Insider purchases are significantly positively related to next year's earnings news across all book-to-market portfolios, while the sign of the relation between insider purchases and contemporaneous earnings is negative (positive) for glamour (value) firms. Finally, we show that the relation between insider trades and future earnings performance is amplified (attenuated) as the likely ex ante benefits (costs) to trading on financial performance information increase.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
