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Keywords:

  • insider trading;
  • earnings management;
  • valuation;
  • accruals;
  • anomalies

Abstract:  This paper analyzes the relationship between earnings management and insider trading, specifically investigating whether discretionary accruals are related to insider trading and valuation. We find strong evidence of insiders managing earnings downward when buying and managing earnings upward when selling. On the marginal basis, value (high book-to-market value) firms manage their earnings upward compared to growth (low book-to-market value) firms, consistent with a signaling hypothesis. However, the opposite is true on the average basis, consistent with an opportunistic hypothesis.