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.