Insider Trading and PEAD

Abstract

This paper examines the association between insider trading during the pre-earnings announcement period and the magnitude of the post-earnings announcement drift (PEAD). Consistent with insiders’ private information being incorporated into prices through their trading, we find PEAD is significantly lower when earnings announcements are preceded by insider trading. This negative association between insider trading and PEAD is stronger when information asymmetry between insiders and outsiders is higher, and when internal and external monitoring of insider trades is weaker. However, in contrast to our primary results, we find that in cases of confirming insider trading (i.e., high levels of insider buying (selling) preceding large positive (negative) earnings surprises), PEAD is significantly larger. Our evidence suggests such trades are based on insiders’ private information about earnings surprises in subsequent quarters and the market fails to fully account for the information contained in these trades. Overall, our findings indicate insider trading contributes to stock pricing efficiency by conveying insiders’ private information to the market.