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Asymmetric trading by insiders – comparing abnormal returns and earnings prediction in Spain and Australia

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  • Helpful suggestions were received from presentations at the University of Amsterdam, Bucharest Academy of Economic Studies, Deakin University, Leeds University, University of Queensland and Strathclyde University. Sanabria acknowledges a study grant from the University of Alicante and Hodgson the financial support from ARC LGA00104218.

Abstract

This paper examines whether the ‘external governance’ imposed by comparative financial accounting standards reduces the trading advantage of insiders. We do this by directly comparing insider trading returns and insider’s ability to predict future earnings from accruals in Spain and Australia. Results show higher excess returns and greater prediction of future earnings from conditioned insider trading in Australia that is then utilized by financial analysts to lower forecast errors – particularly in contrarian-based accruals trading. Possible explanations include: (i) a high asymmetric quality for market-based accruals, (ii) information transfer from informed insiders to uninformed insiders and financial analysts and (iii) a more timely dissemination of financial information in Spain through different ownership and governance structures.

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