Timing, profitability and information content of abnormal insider sales

When corporate insiders sell their stock in quantities that deviate from firm-specific trends, their trades are more likely to precede bad news over a horizon of several months, but not in the short run. This is consistent with insiders avoiding “suspicious timing” when engaging into “suspicious amounts” of trading, the combination of which would likely result in Rule 10b-5 securities lawsuits. Furthermore, the occurrence of abnormal sales is negatively associated with the ex-ante litigation faced by the firm. I also find that patterns of discretionary accruals and unmanaged earnings are indicative of managers using accruals to avoid reporting a loss after their abnormal trades and delay the report of earnings decreases two quarters away from their abnormal sales. In terms of stock returns, there is a smaller amount of good news following abnormal trades that are contemporaneous to loss-avoiding discretionary accruals, which is consistent with managers timing their trades and accruals to maximize their proceeds. By contrast, there is a greater amount of positive returns following trades during quarters where accruals offset an earnings decrease, which suggests managers delay the recognition of bad economic news to avoid litigation. More generally, trades in firm-years subject to high litigation cost precede greater positive stock returns, even if they eventually predict bad news. Finally, abnormal returns and trading volume around SEC filing dates of insider sales indicate that the market reacts to insider sales disclosure after the implementation of Section 403 of the Sarbanes-Oxley Act, which stipulates that insiders must report their trades within two business days. In particular, returns around those filings are associated with the probability that a trade is not motivated by liquidity needs.