Abstract
I find strong evidence of insiders selling shares prior to imminent bad earnings news through their Rule 10b5-1 trading plans. While Rule 10b5-1 trading plans may conjure images of regular selling over a sustained period of time, I find that insiders’ sales under these plans often consist of a small number of sales (the median plan consists of 4 sales) and commonly occur over a short period of time (the median plan lasts less than 150 days). Abnormal stock returns, earnings surprises, and abnormal earnings announcement returns are all significantly negative following plans that are short-term in nature, but not following plans that are long-term in nature. Although Rule 10b5-1 does not specify a minimum length for trading plans, finding that sales within short plans significantly outperform sales within longer plans suggests that restrictions on plan length would reduce the incidence and appearance of informed selling through Rule 10b5-1 plans.
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