TY - JOUR
T1 - Insider Trading Restrictions and Insiders’ Supply of Information
T2 - Evidence from Earnings Smoothing
AU - Zhang, Ivy Xiying
AU - Zhang, Yong
N1 - Funding Information:
* Accepted by Shivaram Rajgopal. We thank two anonymous referees, Phil Berger, Jeff Callen, Peter Chen, Shuping Chen, Zhihong Chen, Mark DeFond, Zhaoyang Gu, Steven Huddart, Ole-Kristian Hope, Sanjay Kallapur, Bin Ke, Jeong-Bon Kim, Hai Lu, Haitian Lu, Patricia O’Brien, Grace Pownall, Shivaram Rajgopal, Katherine Schipper, Derrald Stice, Franco Wong, Yong Yu, Guochang Zhang, Liandong Zhang, Jerry Zimmerman, and seminar partici-pants at the City University of Hong Kong, Hong Kong University of Science and Technology, Hunan University, Singapore Management University, the University of Minnesota, the 2012 American Law and Economics Associa-tion Annual Meetings (Stanford Law School), and the 4th International Conference on Corporate Governance in Emerging Markets (Indian School of Business) for their helpful comments and suggestions. We also thank Evey Pan and Linlin Zhang for their excellent research assistance. Financial support is provided by the Carlson School of Management at the University of Minnesota and the Research Grants Council of Hong Kong (General Research Fund No. 645710). This paper was previously circulated under the title “Insider Trading Restrictions and Insiders’ Supply of Information: Evidence from Reporting Quality.” All errors are our own.
Publisher Copyright:
© CAAA
PY - 2018/6
Y1 - 2018/6
N2 - We exploit the setting of first-time enforcement of insider trading laws to investigate the relationship between insider trading opportunities and insiders’ supply of information. Insider trading opportunities motivate insiders to reduce their supply of information by concealing firm performance, thereby increasing their information advantage over outsiders, resulting in higher insider trading profits. Using data from 40 countries over the 1988–2004 period, we find that reporting opacity, as captured by earnings smoothness, decreases significantly after the initial enforcement of insider trading laws in countries with strong legal institutions. The decrease in earnings smoothness is positively related to the strictness of insider trading laws. The decrease in earnings smoothness is also more pronounced for countries that have more persistent insider trading law enforcement and for countries that impose more severe penalties on insider trading cases. Further analyses show that the decrease in earnings smoothness following insider trading enforcement is concentrated among firms that are not closely held and among high-growth firms. In addition to uncovering a channel through which insider trading restrictions affect the information environment, our evidence highlights the importance of country- and firm-level governance structures in determining the consequences of insider trading restrictions.
AB - We exploit the setting of first-time enforcement of insider trading laws to investigate the relationship between insider trading opportunities and insiders’ supply of information. Insider trading opportunities motivate insiders to reduce their supply of information by concealing firm performance, thereby increasing their information advantage over outsiders, resulting in higher insider trading profits. Using data from 40 countries over the 1988–2004 period, we find that reporting opacity, as captured by earnings smoothness, decreases significantly after the initial enforcement of insider trading laws in countries with strong legal institutions. The decrease in earnings smoothness is positively related to the strictness of insider trading laws. The decrease in earnings smoothness is also more pronounced for countries that have more persistent insider trading law enforcement and for countries that impose more severe penalties on insider trading cases. Further analyses show that the decrease in earnings smoothness following insider trading enforcement is concentrated among firms that are not closely held and among high-growth firms. In addition to uncovering a channel through which insider trading restrictions affect the information environment, our evidence highlights the importance of country- and firm-level governance structures in determining the consequences of insider trading restrictions.
UR - http://www.scopus.com/inward/record.url?scp=85050980028&partnerID=8YFLogxK
U2 - 10.1111/1911-3846.12419
DO - 10.1111/1911-3846.12419
M3 - Journal article
AN - SCOPUS:85050980028
SN - 0823-9150
VL - 35
SP - 898
EP - 929
JO - Contemporary Accounting Research
JF - Contemporary Accounting Research
IS - 2
ER -