RFS Advance Access originally published online on July 14, 2007
Review of Financial Studies 2007 20(6):1833-1864; doi:10.1093/rfs/hhm029
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Insider Trades and Private Information: The Special Case of Delayed-Disclosure Trades
University of Maryland
University of Michigan
Stanford University
Address correspondence to Madhav V. Rajan, Graduate School of Business,Stanford University, 518 Memorial Way, Stanford, CA 94305, USA, or e-mail: mrajan{at}gsb.stanford.edu
JEL: K22, G34, G38, G30, M41
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Abstract |
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In certain circumstances, insider trades such as private transactions between executives and their firms could be disclosed after the end of the firm's fiscal year, on a Form-5 filing. We find that insider sales disclosed in such a delayed manner for large firms are predictive of negative future returns (–6 to –8 percent), as well as lower future annual earnings relative to analyst forecasts. These results stand in contrast to existing findings on the uninformativeness of quickly disclosed open-market insider sales. The Sarbanes-Oxley Act curtailed the use of Form 5 under the presumption that managers used this vehicle opportunistically. Our systematic evidence supports this presumption.
We are grateful to Alon Brav, Adam Gileski, Clement Har, Alan Jagolinzer, Mike Klausner, Maureen O'Hara, Amiyatosh Purnanandam, and Nejat Seyhun for many helpful suggestions. We have also benefited from comments by seminar participants at Chicago, Duke, Harvard, Iowa, London Business School, Michigan, Penn State, Washington University (St. Louis), and Wharton. We are especially indebted to an anonymous reviewer, whose contributions to this article matched those of the authors.