Financial Restatement Announcements and Insider Trading

Abstract

We examine insider trading activities around financial restatement announcements and find strong evidence of informed trading by insiders. Focusing on the association between net insider selling and restatement announcement abnormal returns, we provide evidence of net insider selling before the restatement announcements, little net insider selling immediately around the announcements, and net insider buying after the announcements. The passage of the Sarbanes-Oxley Act constrains informed insider selling before the restatement announcements. Trading before the restatement announcements enables insiders to make a significant profit, especially pre-Sarbanes-Oxley. Overall, our results suggest that insiders trade on privileged knowledge about the forthcoming restatement announcements to their advantage and that they trade in a pattern that minimizes the possibility of insider trading allegations or violating internal corporate insider trading policies.