Do Insiders Trade to Signal their Attitudes Towards Modified Audit Opinions? Evidence from Asian Market

• In Event: Auditing

Abstract

In this paper, we investigate how insiders trade prior to the issuance of first-time modified audit opinions in an Asian context. We use agency and signaling theoretical frameworks to test the link between insider trading activities and the issuance of different types of modified audit opinions. Our evidence is consistent with both. We find that insiders are less likely to buy stocks before the issuance of first-time going concern opinions to avoid losses, and that they are more likely to buy stocks before the issuance of first-time material uncertainty, scope limitation and GAAP violation opinions to send positive signals to the market. We also find that insider buying activity sends positive signals to the market and leads to less negative market reaction to modified audit opinions. Our additional analyses show that insider buying activities at firms with modified audit opinions are consistent with insiders’ optimistic expectations about firms’ prospect. This study contributes to the literature by showing that insiders may buy more stocks to send positive signals to the market when their expectations about firms’ prospects are inconsistent with the bad news from third-party (namely auditors).

Authors

• Andrei Filip, ESSEC Business School

• Anne Jeny, ESSEC Business School

• Jin Jiang, ESSEC Business School