Insider Trading Restrictions and Earnings Management

• In Event: Earnings Management III

Abstract

We provide evidence of lower earnings management in firms that voluntarily adopt insider trading restrictions. We measure these restrictions based on the extent to which insider transactions take place in a short window after a quarterly earnings announcement. Our main findings are robust to controlling for previously documented determinants of earnings
management, and hold across various specifications. In addition, we provide evidence that these restrictions are associated with lower insider trading profitability and lower firm cost
of capital. Further, we do not find evidence of a substitution effect between accruals-based
earnings management and real earnings management, suggesting that these restrictions lower the overall incentives for earnings management. Taken together, our results indicate that the voluntary adoption of blackout periods that limit insider trading improves firm financial reporting quality.

Authors

• Beatriz Garcia Osma, Universidad Carlos III de Madrid

• Elvira Scarlat, IE Business School

• Karin Shields, Birkbeck, University of London