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Insider Trading and Voluntary Disclosures


  • We appreciate the comments of Philip Berger (Editor), an anonymous referee, Brian Cadman, Sandra Chamberlain, Xia Chen, Steve Huddart, S. P. Kothari, Shiva Rajgopal, D. Shores, K. R. Subramanyam, Jeroen Suijs, and workshop and conference participants at MIT, University of Alberta, University of Southern California, the 2004 London Business School Accounting Symposium, the 2004 Accounting Research Conference of the Universities of British Columbia, Oregon, and Washington, the 2005 Canadian Academic Accounting Association annual meeting, and the 2005 American Accounting Association Annual Meeting. This project was partly funded by the KPMG Research Bureau at UBC, the CA Education Foundation of BC, and the Social Sciences and Humanities Research Council of Canada.


We hypothesize that insiders strategically choose disclosure policies and the timing of their equity trades to maximize trading profits, subject to the litigation costs associated with disclosure and insider trading. Accounting for endogeneity between disclosures and trading, we find that when managers plan to purchase shares, they increase the number of bad news forecasts to reduce the purchase price. In addition, this relation is stronger for trades initiated by chief executive officers than for those initiated by other executives. Confirming this strategic behavior, we find that managers successfully time their trades around bad news forecasts, buying fewer shares beforehand and more afterwards. We do not find that managers adjust their forecasting activity when they are selling shares, consistent with higher litigation concerns associated with insider sales. Overall, our evidence suggests that insiders do exploit voluntary disclosure opportunities for personal gain, but only selectively, when litigation risk is sufficiently low.