Analyst Forecasts, Earnings Management, and Insider Trading Patterns

For at least two decades, it was believed that making managers into owners could ameliorate many agency conflicts existing in capital markets settings. In fact, it now appears that managerial ownership of stock itself may encourage earnings manipulations. In this study, we show that CEO insider trading, earnings manipulations, and the ability to meet and exceed market benchmarks are all interrelated. Managers manipulate earnings to exceed analyst earnings forecasts. Additionally, managerial insider selling increases with performance relative to analyst forecasts, and is magnified by stock option holdings. Insider selling is more intense among managers who have used earnings manipulations to exceed forecasts. Additionally, managers who sell following the announcement of an earnings surprise are able to earn abnormal profits. Firms having both positive earnings surprises and insider selling exhibit lower subsequent accounting performance. This study is of interest to academics, practitioners who are interested in the finer mechanisms of markets, and advanced finance students, alike.

Autorentext

Dr. Markarian is an international scholar specializing in corporate governance and executive compensation. He currently is a professor at Instituto de Empresa. Author of many articles, he is a consultant for the Standard and Poor''s, and has received awards by both the American Finance Association and the American Accounting Association