Unreported Insider Trades: Indicators of Future Earnings and Analyst Forecast Error

Abstract

We provide evidence of unreported trading by corporate insiders in their own firm’s shares and link this activity to future firm earnings and analyst forecast error. Unreported trading are cases of discrepancies between insider shareholdings from trades reported to the Exchange and their shareholdings disclosed in the firm’s annual report. Over the five year period from 2007 to 2011, the rate of unreported trading is 7.73%, being at its lowest in 2008 of 4.86% and peaking at 9.59% in 2011. Such activity is influenced by the firm’s growth opportunities and individual insider factors such as equity based compensation and also insider ownership in the firm. We separate unreported purchases from unreported sales due to the different motivations for buying and selling. Unreported purchases do not lead earnings increases though they indicate with analyst forecast error. On the other hand, unreported sales predict future decreases in up to two years’ earnings and are also related to forecast error. These findings suggest that insiders are aware of decreases in earnings and conceal their sales to profit from such information. Insiders also trade opportunistically on analyst forecast error.