INSIDER TRADING FOLLOWING MATERIAL NEWS EVENTS - EVIDENCE FROM EARNINGS

Trading by corporate insiders has been a significant public policy iss ue in the United States for the past several decades. Despite a series of laws and prohibitions against trading by insiders on material non- public information, the academic literature unambiguously suggests tha t insiders earn abnormal profits on their stock transactions. In gener al, the literature suggests that purchases (sales) by insiders are fol lowed by positive (negative) abnormal stock returns. Because ordinary investors may benefit from knowledge of insider trading activity, the financial press and investment analysts frequently provide information on recent insider trades. A recent trend emerging from both actions b y regulatory authorities and companies is the use of policies that res trict insider trading to time periods following regular news announcem ents. Several companies have adopted policies (with the SEC's approval ) that limit insider transactions to the period immediately after disc losure of the quarterly earnings report. Presumably, the intended effe ct of such policies is to equalize access to information between insid ers and external investors and ensure that the firm's officers comply with insider trading laws. We provide evidence on the incidence and pr ofitability of insider trading following quarterly earnings announceme nts. If policies to restrict insider trading to the post-earnings disc losure period induce insiders to delay what otherwise would be profita ble trades, we would expect: (1) the incidence of insider trading will increase after quarterly earnings disclosure; (2) post-announcement i nsider purchases (sales) will be preceded by positive (negative) abnor mal returns, consistent with foregone trading profits; and (3) no syst ematic abnormal returns will follow these trades if public disclosure erodes any informational advantage possessed by insiders. Our analysis indicates that insider trading increases immediately after quarterly earning disclosure, but these trades are not associated with foregone trading profits. Consistent with this finding, there is no positive as sociation between post-earnings disclosure insider positions and earni ngs forecast errors, as would be expected if insiders delayed purchase s (sales) prior to positive (negative) earnings news. Our evidence als o indicates that a substantial number of insiders buy (sell) after unf avorable (favorable) earnings news, suggesting that insider trading ac tions incorporate information not revealed by earnings announcements. We also find that post-earnings disclosure trades are associated with significant abnormal returns following trade execution. Overall, our a nalyses suggest that stock price behavior associated with insider trad es following earnings announcements is not substantively different fro m the results documented in numerous prior studies using broader sampl es of insider trades. These results suggest that policies limiting per iods of acceptable insider trading likely after when trades occur, but they do not eliminate insider trading profits. These policies also do not appear to impose significant opportunity costs in terms of forego ne trading profits for insider trades actually executed. This conclusi on, however, is conditional since we cannot observe the effects of suc h policies on insider trades that could have been executed but were no t.