Due to their access to non-public information, insiders frequently have the opportunity to make trades based on superior information. Information contained in earnings forecasts is value-relevant and affords informed insiders the ability to earn abnormal returns by trading in advance of forecast disclosure. Penman (1982) finds evidence of informed insider trading activity prior to earnings forecasts for a sample of forecasts made during the years 1967 to 1974. Since 1974, significant structural changes have occurred with respect to insider trading and management earnings forecast regulation. This research tests whether insiders trade in an informed manner and earn abnormal returns prior to forecast release with a more current (1982-1987) and complete sample. Tests are also performed to determine the role that incentives and disincentives in the form of the magnitude and tone of the earnings surprise play in determining insider trading activity. Additionally, tests are performed to determine if incentives for litigation in the form of pre-forecast insider trading and the existence of a bad news forecast affect the sign and magnitude of ex-post forecast error. Finally, tests are performed to examine whether the Insider Trading Sanctions Act (ITSA) of 1984 affected insider trading prior to earnings forecasts. / Insiders are observed making informed trades prior to good news forecasts, but not prior to bad news forecasts. However, insiders are not observed earning abnormal returns on average. The magnitude of the earnings surprise is strongly related to insider trading activity. Weak support is found for the prediction that the presence of a bad news forecast will reduce insider trading activity. Insider trading activity is not related to the sign of the ex-post forecast error, although a weak negative relationship between insider trading activity and the magnitude of the ex-post forecast error is found. A negative relationship is found between the magnitude of ex-post forecast error and the presence of a bad news forecast. Overall, the ITSA had mixed effects. More accurate forecasts are produced in the presence of pre-forecast insider trading and bad news forecasts during the post-ITSA sub-period. However, insider trading activity increased prior to good news forecasts post-ITSA. / Source: Dissertation Abstracts International, Volume: 55-09, Section: A, page: 2894. / Major Professor: Stephen P. Baginski. / Thesis (Ph.D.)--The Florida State University, 1994.
| Identifer | oai:union.ndltd.org:fsu.edu/oai:fsu.digital.flvc.org:fsu_77263 |
| Contributors | Typpo, Eric Wilhelm., Florida State University |
| Source Sets | Florida State University |
| Language | English |
| Detected Language | English |
| Type | Text |
| Format | 121 p. |
| Rights | On campus use only. |
| Relation | Dissertation Abstracts International |
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