Do the Merits Matter More After Securities Litigation Reform? Evidence from Restatements, Earnings Forecasts, and Insider Trading

2004 ◽  
Author(s):  
Marilyn F. Johnson ◽  
Karen K. Nelson ◽  
Adam C. Pritchard
Keyword(s):  
Insider Trading ◽  
Earnings Forecasts ◽  
Securities Litigation

Management Earnings Forecasts, Insider Trading, and Information Asymmetry

2013 ◽  
Author(s):  
Anastasia Kraft ◽  
Bong Soo Lee ◽  
Kerstin Lopatta
Keyword(s):  
Information Asymmetry ◽  
Insider Trading ◽  
Earnings Forecasts ◽  
Management Earnings Forecasts

The information content of managerial insider trading: evidence from analyst forecasts

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Omar Esqueda ◽  
Thanh Ngo ◽  
Daphne Wang
Keyword(s):  
Insider Trading ◽  
Fixed Effects ◽  
Information Dissemination ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Ordinary Least Squares ◽  
Content Type ◽  
Forecast Bias ◽  
Forecast Precision ◽  
Insider Trades

PurposeThis paper examines the effect of managerial insider trading on analyst forecast accuracy, dispersion and bias. Specifically, the authors test whether insider-trading information is positively associated with the precision of earnings forecasts. In addition, this relationship between Regulation Fair Disclosure (FD) and the Galleon insider trading case is examined.Design/methodology/approachPooled ordinary least squares (Pooled OLS) rregressions with year-fixed effects, firm-fixed effects, and firm-level clustered standard errors are used. Our proxies for forecast precision are regressed on alternative measures of insider trading activities and a vector of control variables.FindingsInsider-trading information is positively associated with the precision of earnings forecasts. Analysts provide better forecast accuracy, less forecast dispersion and lower forecast bias among firms with insider trading in the six months leading to the forecast issues. In addition, bullish (bearish) insider trades are associated with increased (decreased) forecast bias. Insider trading information complements analysts' independent opinion and increases the precision of their forecast.Practical implicationsRegulators may pursue rules that promote the rapid disclosure of managerial insider trades, particularly given the increasing availability of Internet tools. Securities regulators may attempt to increase transparency and enhance the reporting procedures of corporate insiders, for example, using Internet sources with direct release to the public to ensure more timely information dissemination.Originality/valueThe authors document a positive association between earnings forecast precision and managerial insider trading up to six months prior to the forecast issue. This relationship is stronger after the Securities and Exchange Commission (SEC) prohibited the selective disclosure of material nonpublic information through Regulation FD. In addition, the association between insider trading and forecast accuracy has weakened after the Galleon insider trading case.

SEC charges broker-dealer for failure to protect against insider trading by employees

2015 ◽  
Vol 16 (1) ◽  
pp. 59-62
Author(s):  
Daniel A. Nathan ◽  
Tiffany Rowe
Keyword(s):  
Insider Trading ◽  
Private Equity ◽  
Public Information ◽  
Securities And Exchange Commission ◽  
Confidential Information ◽  
Securities Litigation ◽  
Content Type ◽  
Improper Use ◽  
Failure To Protect ◽  
Securities Laws

Purpose – To alert broker-dealers to Securities and Exchange Commission charges brought against a broker-dealer for ineffective controls over employee use of confidential information and to provide guidance regarding development and implementation of controls to protect against improper use of material non-public information by employees. Design/methodology/approach – Reviews Securities and Exchange Commission settlement order with broker-dealer for violations of securities laws for failure to adequately prevent insider trading by employees and provides guidance for implementing control to prevent insider trading. Findings – The Securities and Exchange Commission’s charges are the first to be brought against a broker-dealer for failure to adequately protect against insider trading. A broker used a customer’s confidential information regarding an impending acquisition by a private equity firm to purchase stock in the target company. The broker-dealer settled charges of violations of the federal securities laws for failing to adequately establish, maintain, and enforce policies and procedures to protect against insider trading by employees with access to confidential client information. Originality/value – Practical guidance regarding internal controls at broker-dealers from experienced securities litigation and regulation lawyers.

Summary of Recommendations for Adoption

2021 ◽  
pp. 301-322
Author(s):  
Marc I. Steinberg
Keyword(s):  
Corporate Governance ◽  
Mergers And Acquisitions ◽  
Insider Trading ◽  
Securities And Exchange Commission ◽  
Business Practices ◽  
Due Diligence ◽  
Securities Litigation ◽  
Legitimate Business ◽  
Adoption And Implementation ◽  
The U.S

This chapter summarizes key recommendations that are proffered throughout this book. Recommendations that are proposed encompass the areas of the disclosure framework, issuer exemptions from Securities Act registration, exemptions for resales of securities, the Securities Act registration framework, due diligence in registered offerings, the federalization of corporate governance, private securities litigation, insider trading, mergers and acquisitions, and the Securities and Exchange Commission. In total, well over 100 recommendations are set forth in this chapter. Hence, this book has identified problematic areas, analyzed their shortcomings, and recommended solutions that should ameliorate the deficiencies that exist. With the adoption and implementation of the recommendations made herein, the U.S. securities framework should become more transparent, even-handed, and investor-oriented without imposing undue burdens on legitimate business practices.

Do voluntary positive earnings forecasts of Chinese listed companies benefit publicly or privately?

2018 ◽  
Vol 9 (1) ◽  
pp. 78-98
Author(s):  
Jing Zhang ◽  
Guihua Lu ◽  
Baoliang Liu
Keyword(s):  
Insider Trading ◽  
Capital Market ◽  
Information Disclosure ◽  
Stock Exchange ◽  
Scientific Evidence ◽  
Earnings Forecasts ◽  
Listed Companies ◽  
Security Market ◽  
Content Type ◽  
The Capital Market

Purpose According to the Chinese Stock Exchange rules, the listed companies’ management earnings forecasts (MEFs) are divided into mandatory and voluntary earnings forecasts. Different information disclosure mechanisms may bring different economic consequences. Compared with the former, when, how frequently and what kind of voluntary earnings forecasts are disclosed almost entirely depends on the discretion of managers and the major shareholders[1]. The purpose of this paper is to examine whether listed companies’ voluntary earnings forecasts have self-benefited motives before the major shareholders’ selling of original non-tradable shares and how the capital market reacts in China. Design/methodology/approach This paper uses multiple regression analyses to examine the influence of the major shareholders’ non-tradable shares selling motives on MEFs’ type and frequency of A-share listed companies and makes robust tests using the difference in difference model (DID). Findings In the paper, it is found that before the major shareholders’ selling of original non-tradable shares, managers of listed companies are prone to release positive voluntary MEFs; during the shares reduction year of the major shareholders, the disclosure frequency of MEFs is much higher; these forecasts before the major stockholders’ selling have significant higher excess market returns. The evidence suggests that voluntary positive MEFs are for the major shareholders’ self-interested motive rather than for the open, fair and just disclosure purpose that damages the allocation efficiency of the capital market. Originality/value This paper enriches the understanding of voluntary MEFs’ incentives literature and provides scientific evidence to improve the supervision of information disclosure and insider trading in Chinese security market.

scholarly journals The impact of insider trading on analyst coverage and forecasts

2020 ◽  
Vol 33 (3) ◽  
pp. 499-521
Author(s):  
Guanming He ◽  
David Marginson
Keyword(s):  
Insider Trading ◽  
Private Information ◽  
Earnings Forecasts ◽  
Positive Association ◽  
Future Prospects ◽  
Analyst Coverage ◽  
Content Type ◽  
Insider Trades ◽  
The Impact ◽  
Reg Fd

Purpose The purpose of this study is to examine the effect of insider trading on analyst coverage and the properties of analyst earnings forecasts. Given the central role of analysts for information diffusion in stock markets, advancing understanding of the role insider trades may play in analyst coverage and forecasts, especially in the context of a changing legal environment (e.g. the implementation of Regulation Fair Disclosure [Reg FD]), should be a worthy goal. Design/methodology/approach To address the research questions, the authors run regressions in which the authors identify and control for as many possible determinants of analyst coverage and forecasts (e.g. firm size, information asymmetry and earnings performance) that are correlated with insider trades. To alleviate endogeneity concerns, the authors use three approaches. First, the authors extend the sample period to the post-Reg-FD period in which managers are not allowed to provide private information to financial analysts. Second, the authors measure analyst coverage in a window that is lagged by insider trades. Third, the authors employ firm-fixed-effects regressions in all the multivariate tests. Finally, following Larcker and Rusticus (2010), the authors conduct the impact threshold for a confounding variable test to assure that all regression analyses are indeed immune to the potential correlated-omitted-variable bias. Findings The authors find that the level of analyst coverage is positively related to the intensity of insider trades and that analyst coverage is more strongly associated with insider purchases than with insider sales. The authors also find that the positive association between analyst coverage and insider trades is less pronounced after the passage of Reg FD. Further investigations reveal that analysts revise their earnings forecasts upward following insider purchases, the informativeness of analyst forecast revisions significantly increases following insider purchases and optimistic bias in analyst forecast revisions is reduced as a result of insider purchases; the authors do not find similar evidence for insider sales. Research limitations/implications A large body of insider trading literature (Johnson et al., 2009; Badertscher et al., 2011; Thevenot 2012; Skaife et al., 2013; Billings and Cedergren 2015; Dechow et al., 2016) provides evidence that insiders actively trade on their private information, such as their foreknowledge of price-relevant corporate events. This literature suggests that insider trades are potentially value-relevant and are informative about a firm’s future prospects. However, less research attention has been paid to investigating how insider trades might affect market participants’ (especially sophisticated participants’) behavior. This study contributes to understanding the role that insider trading may play in shaping analyst behavior. Practical implications Prior research (Frankel and Li, 2004; Lustgarten and Mande, 1995; Carpenter and Remmers, 2001; Seyhun, 1990) maintains that insider sales are less informative about a firm’s future prospects than are insider purchases because insider sales might take place for the liquidity and diversification purposes. By probing the stock price responses to insider selling activities, Lakonishok and Lee (2001), Jeng et al. (2003) and Fidrmuc et al. (2006) infer that insider selling is not informative about future firm performance. However, for such an inference, the authors cannot rule out the possibility that insider sales do convey value-relevant information, but the stock market does not react correctly to such trading information (Beneish and Vargus, 2002). Because the authors focus on examining analysts’ responses to insider sales, and analysts are supposed to be sophisticated in information processing, this study adds more compelling evidence for the notion that insider sales convey less information about a firm’s future prospects than do insider purchases. Social implications There is an ongoing debate about the benefits and drawbacks of insider trading. Opponents of insider trading view insider trades as inequitable and immoral and assert that restricting insider trades curbs resource misallocation and benefits the whole society. Proponents contend that insider trading accelerates the price discovery process, increases market efficiency (Leland, 1992; Bernhardt et al., 1995; Choi et al., 2016) and may even play a role in rewarding and motivating executives (Roulstone, 2003; Denis and Xu, 2013). The authors add to this debate by documenting that insider trading increases the amount of information valuable to analyst research activities and helps enhance analyst services. Originality/value To the best of the authors’ knowledge, this study is the first to offer firm-level evidence of a positive association between insider trades and analyst coverage. By accounting for the post-Reg-FD regime, this paper is also the first to provide evidence on how analysts, in the absence of access to management’s private information because of the regime change by Reg FD, react to insider trades.

Management earnings forecasts, insider trading, and information asymmetry

2014 ◽  
Vol 26 ◽  
pp. 96-123 ◽  
Author(s):  
Anastasia Kraft ◽  
Bong Soo Lee ◽  
Kerstin Lopatta
Keyword(s):  
Information Asymmetry ◽  
Insider Trading ◽  
Earnings Forecasts ◽  
Management Earnings Forecasts

Credibility of Management Forecasts

2005 ◽  
Vol 80 (4) ◽  
pp. 1233-1260 ◽  
Author(s):  
Jonathan L. Rogers ◽  
Phillip C. Stocken
Keyword(s):  
Insider Trading ◽  
Financial Distress ◽  
Stock Price ◽  
Earnings Forecasts ◽  
Industry Concentration ◽  
Management Forecasts ◽  
Management Earnings Forecasts ◽  
Forecast Bias ◽  
Price Response ◽  
Trading Activities

We examine how the market's ability to assess the truthfulness of management earnings forecasts affects how managers bias their forecasts, and we evaluate whether the market's response to management forecasts is consistent with it identifying predictable forecast bias. We find managers' willingness to misrepresent their forwardlooking information as a function of their incentives varies with the market's ability to detect misrepresentation. We examine incentives induced by the litigation environment, insider trading activities, firm financial distress, and industry concentration. With regard to the stock price response to forecasts, we find the market varies its response with the predictable bias in the forecast. The efficiency of the market's response, however, varies with the forecast news.

Financial analysts' earnings forecasts and insider trading

1995 ◽  
Vol 14 (3) ◽  
pp. 233-261 ◽  
Author(s):  
Steven Lustgarten ◽  
Vivek Mande
Keyword(s):  
Insider Trading ◽  
Financial Analysts ◽  
Earnings Forecasts
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