Insider Trading, Earnings Quality, and Accrual Mispricing

Messod Daniel Beneish · Mark E. Vargus

510 citations0/0 files storedThe Accounting Review

No readable copy stored yet — this record is metadata only.

No open-access location is known for this record yet.

Literature note Cite in a project Citation map

Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Corporate Finance and Governance

Abstract

This paper investigates whether insider trading is informative about earnings quality and the valuation implications of accruals. We show that (1) the one-year-ahead persistence of income-increasing accruals is significantly lower when accompanied by abnormal insider selling and greater when accompanied by abnormal insider buying; (2) the accrual mispricing phenomenon observed in previous work (e.g., Sloan 1996) is due to the mispricing of income-increasing accruals; (3) one-year-ahead hedge returns to trading strategies based on the direction of accruals and insider trading significantly exceed those based on accruals alone; and (4) the lower persistence of income-increasing accruals accompanied by abnormal insider selling appears to be at least partly attributable to opportunistic earnings management. Our evidence suggests that market participants and researchers can use managers' contemporaneous trading in ex ante assessing the likelihood that the firms' accruals are of high or low quality, and in assessing the likelihood of earnings management. Our evidence suggesting that insiders trade on their knowledge of factors associated with accrual persistence is also relevant to policymakers charged with regulating insider trading.

Paper brief

Loading…

Cite this work

Citation unavailable for this work.

BibTeX RIS CSL-JSON

No public copy is stored for this record, so only the metadata is cited.

Citations in this library

Citation map →

Stored only when both papers are in the corpus — 510 citations exist upstream.

References

1992The Cross-Section of Expected Stock Returns 1993Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency 1991Earnings Management During Import Relief Investigations 1996Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*1997Earnings management to avoid earnings decreases and losses 2012Detecting Earnings Management 1992The investment opportunity set and corporate financing, dividend, and compensation policies 1999Earnings Management to Exceed Thresholds

Cited by

2004Do insider trades reflect both contrarian beliefs and superior knowledge about future cash flow realizations?2002Inventory Changes and Future Returns 2004Taxable Income, Future Earnings, and Equity Values 2011Internal corporate governance, CEO turnover, and earnings management 2010Product Market Competition, Insider Trading, and Stock Market Efficiency 2015

Explore the map →

Papers that cite the same references — the relational fallback while embeddings are still backfilling.

Imported from OpenAlex (CC0) — nothing here is generated.