How Insiders’ Personal Incentives and Timeliness of Information Revelation are Related to Their Sales Timing

Abstract

In this paper, we investigate how insiders’ personal incentives and the timeliness of information revelation are related to the timing of their sales. We use a unique data set of 7,678 insider sales of listed firms in Taiwan, where insider sales exceeding 10,000 shares must be reported to the regulatory entity on an ex-ante basis so that the price pattern before announcement remains independent from insider sales and therefore closely captures insiders’ timing. We find evidence from insiders’ timing that the cumulative abnormal returns monotonically increase up to the announcement of insider sales, and decrease thereafter. Moreover, insiders’ timing and profitability are closely related to their personal incentives, as manifested in lower cash flow rights, a higher pledge ratio of holding shares for bank loans, higher control-cash flow deviation, and the condition that insiders simultaneously serve in managerial posts. Furthermore, the timeliness of information revelation affects insiders’ timing in the sense that optimistic news is revealed before the announcement whereas a decrease in earnings is revealed after the execution of insider sales. Finally, the interactions between the personal incentives of insiders and the timeliness of information revelation also have an effect on their timing and profitability.