Sunday, March 30, 2008
Insider Trading Before Accounting Scandals, by ANUP AGRAWAL, University of Alabama - Culverhouse College of Commerce & Business Administration, and TOMMY COOPER, University of Alabama - Culverhouse College of Commerce & Business Administration, was recently posted on SSRN. Here is the abstract:
We examine insider trading in a sample of over 500 firms involved in accounting scandals revealed by earnings-decreasing restatements, and in a control sample of non-restating firms. Managers are less likely to trade before accounting scandals than before other major corporate events such as takeovers or bankruptcies. Managers who sell stock while earnings are misstated potentially commit two crimes, earnings manipulation and insider trading, and their selling increases investor scrutiny and the likelihood of the manipulation being revealed. We analyze open-market stock transactions of five groups of corporate insiders: top management, top financial officers, all corporate officers, board members, and blockholders. We examine their purchases, sales and net sales during the misstated period and a pre-misstated period, using a difference-in-differences approach. Using several measures of the level of insider trading, we estimate cross-sectional regressions that control for other determinants of the level of insider trading. For the full sample of restating firms, we find weak evidence that top managers of misstating firms sell more stock during the misstated period than during the pre-misstated period, relative to the control sample. But in a number of sub-samples where insiders had greater incentives to sell before the revelation of accounting problems, we find strong evidence that top managers of restating firms sell substantially more stock during the misstated period. These findings suggest that managers' desire to sell their stockholdings at inflated prices is a motive for earnings manipulation. Our finding that insiders brazenly trade on a crime for which they are potentially culpable suggests that insider trading is more widespread in the market than has been found in the prior literature.