Insightful Insiders? Insider Trading and Stock Return around Debt Covenant Violation Disclosures

The importance of debt covenant violation is to minimize the debtholder default risk. The possibility of debtholder’s default risk may be caused by liquidity problems, low profitability, and bad quality of earnings. Hence, this study aims to proof the tendency of debtholder to violate debt covenants by measuring current ratio volatility, return on assets, and earnings quality as independent variables. By using five companies from construction and property sub-sector that listed on Indonesia Stocks Exchange in 2016- 2018, the data are analyzed with multiple linear regression model for panel data. From this study, we can conclude that the impact of return on assets to debt covenant violation is significantly negative, debtholders with poor financial performance have higher potential to do debt covenant violation. However, there is no evidence that debt covenant violation is affected current ratio volatility and earnings quality.

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After-Hours Block Trading, Short Sales, And Information Leakage: Evidence From Korea

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v33i2.9900 ◽

2017 ◽

Vol 33 (2) ◽

pp. 263-282 ◽

Cited By ~ 1

Author(s):

Taehoon Lee ◽

Sang-gyung Jun

Keyword(s):

Stock Returns ◽

Insider Trading ◽

Private Information ◽

Stock Price ◽

Stock Return ◽

Governance Structure ◽

Sales Volume ◽

Short Sales ◽

After Hours ◽

The Impact

We investigate the impact of insider trading in after-hours block market on stock price and short sales volume, before and after the trading becomes public information. During pre-announcement period, positive (negative) abnormal stock return is generated when insiders buy (sell) their shares but does not when quasi-insiders trade, implying that stock price reflects long-lived private information of corporate governance structure. The impact is most prominent when ownership shares are transferred to (from) corporate insiders. In contrast, short sales volume generally does not depend on the identity of block holders. Short sales volume has a negative correlation with abnormal stock return only during the transaction date, indicating that a short-sale decision of tippees is based on their sole expectation on instantaneous stock returns. We also find evidence that insiders select the timing of their trades with respect to maximizing their realized profits or minimizing their purchasing costs.

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Creditor Influence and CEO Compensation: Evidence from Debt Covenant Violations

The Accounting Review ◽

10.2308/accr-52013 ◽

2018 ◽

Vol 93 (5) ◽

pp. 23-50 ◽

Cited By ~ 4

Author(s):

Steven Balsam ◽

Yuqi Gu ◽

Connie X. Mao

Keyword(s):

Risk Taking ◽

Ceo Compensation ◽

Regression Discontinuity ◽

Firm Dynamics ◽

Debt Covenants ◽

Compensation Package ◽

Debt Covenant ◽

Debt Covenant Violation ◽

The Right ◽

Covenant Violations

ABSTRACT Debt covenant violation alters firm dynamics, providing creditors with the right to demand repayment, and via that right, influence firm actions. We provide evidence consistent with creditors employing that channel to influence CEO compensation. Using regression discontinuity analysis, we show that in the year after a covenant violation, after controlling for other factors, CEO compensation is 8.5 percent lower and the CEO's compensation package contains fewer risk-taking incentives, as the vega associated with newly granted options is 26 percent lower. These changes are more pronounced when the creditor has greater influence, such as when the borrower and creditor have a prior lending relationship, the creditor is a highly reputable bank, or when the borrower is financially weaker. We also find that CEOs' risk-taking incentives decrease with the number of debt covenants; in particular, the number of performance debt covenants being breached. JEL Classifications: G21; G34.

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Incentives and Penalties Related to Earnings Overstatements that Violate GAAP

The Accounting Review ◽

10.2308/accr.1999.74.4.425 ◽

1999 ◽

Vol 74 (4) ◽

pp. 425-457 ◽

Cited By ~ 335

Author(s):

Messod D. Beneish

Keyword(s):

Insider Trading ◽

Efficient Method ◽

Corporate Performance ◽

Securities And Exchange Commission ◽

External Financing ◽

Trading Behavior ◽

The Face ◽

Debt Covenant ◽

The Cost ◽

Covenant Violations

This paper investigates the incentives and the penalties related to earnings overstatements primarily in firms that are subject to accounting enforcement actions by the Securities and Exchange Commission (SEC). I find (1) that managers in treatment firms are more likely to sell their holdings and exercise stock appreciation rights in the period when earnings are overstated than are managers in control firms, and (2) that the sales occur at inflated prices. I do not find evidence that earnings overstatement in these firms is motivated by concerns about debt covenant violations or the cost of external financing. The evidence suggests that the monitoring of managers' trading behavior can be informative about the likelihood of earnings overstatement. Many economists believe that insider trading is an efficient method of compensating managers for their efforts. These economists argue that reputation losses would preclude managers from making profitable trades before periods of poor corporate performance. Consequently, this paper also investigates the employment and monetary penalties imposed on managers after the earnings overstatement is publicly discovered. This evidence reveals that (1) managers' employment losses subsequent to discovery are similar in firms that do and do not overstate earnings and (2) that the SEC is not likely to impose trading sanctions on managers in firms with earnings overstatement unless the managers sell their own shares as part of a firm security offering. The evidence suggests that neither employment or SEC-imposed monetary losses are effective in preventing the managers in these firms with extreme earnings overstatements from selling their stake in their firms in the face of declining performance.

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