Evidence on the Non-Linear Relation between Insider Trading Decisions and Future Earnings Information

Journal of Law, Economics, and Policy, Vol. 4, No. 2, pp. 409-448, Spring 2008

Posted: 29 Sep 2008 Last revised: 8 Oct 2013

See all articles by Joseph D. Piotroski

Joseph D. Piotroski

Stanford Graduate School of Business

Darren T. Roulstone

Ohio State University (OSU) - Fisher College of Business

Date Written: September 25, 2008

Abstract

In this paper, we explore an insiders' decision to trade or not trade on the basis of future earnings information. Consistent with litigation, political, and reputation-related costs shaping insider-trading decisions, we find that relations between insider trading decisions and next year's earnings change are not strictly linear. First, we find that the likelihood of insider purchases is positively related to next year's earnings innovation, yet this relation is attenuated in the case of extreme positive innovations. Second, we find that the likelihood of an insider selling shares and exercising stock options is negatively related to next year's earnings innovation, yet this relation is attenuated in the case of extreme negative innovations. The non-linear relation between insider sales and future negative earnings news is more pronounced than the nonlinearity between insider purchases and future earnings news, suggesting that the expected costs associated with insider selling are economically larger than the costs associated with insider buying. Together, these estimations suggest that insiders trade on the basis of future earnings news, yet there exist regions where the expected costs of trading subsume the expected gains to trading on private information. Finally, we investigate the role of earnings persistence as an alternative explanation for our results. We find that insiders only trade on persistent earnings innovations, and that, after controlling for persistence, insiders still curtail trading when earnings innovations are extreme.

Suggested Citation

Piotroski, Joseph D. and Roulstone, Darren T., Evidence on the Non-Linear Relation between Insider Trading Decisions and Future Earnings Information (September 25, 2008). Journal of Law, Economics, and Policy, Vol. 4, No. 2, pp. 409-448, Spring 2008, Available at SSRN: https://ssrn.com/abstract=1273834

Joseph D. Piotroski

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Darren T. Roulstone (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
870
PlumX Metrics