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Insider sales based on short-term earnings information

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  • Jonathan A. Milian

    (Florida International University)

Abstract

I find strong evidence of insiders selling shares prior to imminent bad earnings news through their Rule 10b5-1 trading plans. While Rule 10b5-1 selling plans may conjure images of regular selling over a sustained period of time, I find that insiders’ sales under these plans often consist of a small number of sales (the median plan consists of four sales) and commonly occur over a short period of time (the median plan lasts less than 150 days). Abnormal stock returns, earnings surprises, and abnormal earnings announcement returns are all significantly negative following plans that are short-term in nature, but not following plans that are long-term in nature. Although Rule 10b5-1 does not specify a minimum length for selling plans, finding that sales within short plans significantly outperform sales within longer plans suggests that restrictions on plan length would reduce the incidence and appearance of informed selling through Rule 10b5-1 plans.

Suggested Citation

  • Jonathan A. Milian, 2016. "Insider sales based on short-term earnings information," Review of Quantitative Finance and Accounting, Springer, vol. 47(1), pages 109-128, July.
    • Handle: RePEc:kap:rqfnac:v:47:y:2016:i:1:d:10.1007_s11156-014-0496-7
    DOI: 10.1007/s11156-014-0496-7
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    Cited by:

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    More about this item

    Keywords

    Insider trading; Earnings announcements; SEC Rule 10b5-1; Pre-planned trades;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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