Financial disclosure and the accountant's responsibility to shareholders: The case of insider trading
This study analyzes common stock return behavior around the transaction date of insider trading. The study considers sale and purchase transactions reported in the SEC Official Summary for 1984. Results indicate significant stock return reaction associated with insider trading. Subsequent to the transactions, the Wall Street Journal was searched for good, bad, or neutral news about the companies where chairmen of the board reported purchases late. Results showed that statistically significant positive abnormal returns were earned only in the instances where the firm released good news.
Cumulative prediction error technique is used to analyze the purchase and sale transactions of chairmen of the board, officers/directors, directors, and officers. The purchase and sale transactions are divided into samples of timely reported and late reported transactions. The sample tested is drawn from the 1984 SEC Official Summary. The final sample consists of 13,102 transactions of 100 or more shares of directly owned common stock of firms included on the 1986 CRSP tape.
Results show that the groups of all insider purchases and all insider sales earn excess abnormal returns. Sub-groups do not benefit equally from insider trading. The four groups of sellers experience comparable modest profits. Among purchasers, the chairmen of the board earn much greater excess positive abnormal returns than do the other sub-samples.
One interpretation of the results is that the FASB should require disclosure of insider trading information. The information is gathered at little additional cost to the firm. Timely insider trading information may assist the investor in his investment decision process. The FASB has the authority to require disclosure and the requirement could be easily enforced.