Insider Trading and Voluntary Disclosures
By Qiang Cheng, Kin Lo. 2006
480 citations recorded by the source corpus.
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.
Subfields: Accounting, Finance
View Paper: https://www.semanticscholar.org/paper/f7dc49804cbe0a05e0ba47718685d6be13aeba62
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Citations in the corpus
- Competition of the Informed: Does the Presence of Short Sellers Affect Insider Selling? (2015, background): “, 2012), events upon which insiders trade (e.g., Kahle, 2000; Ke et al., 2003; Cheng and Lo, 2006; Huddart et al., 2007), or counterparties involved in trading, such as institutional and individual investors (Sias and Whidbee, 2010).”
- Management Earnings Forecasts: A Review and Framework (2008, unknown): “In a similar vein, Cheng and Lo ͑2006͒ and Rogers and Stocken ͑2005͒ find that insider trading is related to unfavorable management forecasts.”
- Bundled Forecasts in Empirical Accounting Research (2013, unknown): “After we account for the measurement error, the bundled forecasts in our sample represent good news, on average, which is consistent with evidence of selective disclosure in other settings (Cheng and Lo, 2006; Kothari et al., 2009; Sletten, 2009).”
- Jeopardy, Non-Public Information, and Insider Trading Around SEC 10-K and 10-Q Filings (2005, unknown): “Lakonishok and Lee (2001) and Cheng and Lo (2005) present evidence that insiders buy (sell) when the abnormal stock return is negative (positive) over the previous 3 to 6 months.”
- Unintended Consequences of Granting Small Firms Exemptions from Securities Regulation: Evidence from the Sarbanes‐Oxley Act (2009, unknown): “We obtain residuals of the above variables from the insider trading prediction model in Cheng and Lo (2006) (Netpercent_rq, Buypercent_rq, and Sellpercent_rq) and use the residuals as the dependent variables in model (7).”
- Corporate governance and the profitability of insider trading (2016, unknown): “This asymmetric effect of governance on the profitability of insider trading is consistent with both the legal riskbased explanation by Cheng and Lo (2006) and Rogers (2008) and the compensation-based explanation suggested by Roulstone (2003).”
- Managerial Incentives and Management Forecast Precision (2013, methodology): “Building on these findings, Cheng and Lo (2006) argue that managers may change the frequency of voluntary disclosure before insider trading and they find that managers are more likely to disclose bad news before buying shares. Using the change in liquidity to proxy for disclosure quality, Rogers (20”