Indirect Evidence of Insider Trading Prior To and After Earnings Announcements

• In Event: Public Interest Considerations

Abstract

Using a data set of stock prices before and after all announcements occurring from January 1980 through December 2012 from five U.S. exchanges, we determined that investors accumulated positive returns prior to earnings announcements. We found that earnings surprises as defined by the differences between earnings forecasts reported by Bloomberg to the after hours’ earnings announcements correlate positively to both actual and abnormal one day returns. In addition, we compared the preannouncement returns to after announcement returns and found a negative correlation. Our research questions were framed by the efficient market hypothesis, which suggests that information is fully absorbed in a market price. Given the theoretical framework we infer that our results provide indirect evidence of traders using insider information. We also found that the results did not vary over time. This suggests that increased SEC enforcement has had little effect on insider trading.

Authors

• Zigan Wang, Columbia University

• Roger William Mayer, SUNY College at Old Westbury

• Wen-Wen Chien, SUNY-Old Westbury