Short-Horizon CEO Incentives and Abnormal Stock Returns, Insider Trading, and Earnings Management

2013 ◽  
Author(s):  
Jianxin Daniel Chi ◽  
Manu Gupta ◽  
Shane A. Johnson
Keyword(s):  
Earnings Management ◽  
Stock Returns ◽  
Insider Trading ◽  
Ceo Incentives ◽  
Abnormal Stock Returns ◽  
Short Horizon

scholarly journals Mispricing of Book-Tax Differences and the Trading Behavior of Short Sellers and Insiders

2013 ◽  
Vol 89 (2) ◽  
pp. 511-543 ◽  
Author(s):  
Sabrina S. Chi ◽  
Morton Pincus ◽  
Siew Hong Teoh
Keyword(s):  
Stock Returns ◽  
Insider Trading ◽  
Short Selling ◽  
Data Availability ◽  
Large Set ◽  
Trading Behavior ◽  
Earnings Growth ◽  
The Public ◽  
Short Sellers ◽  
Abnormal Stock Returns

ABSTRACT We find evidence that investors misprice information contained in book-tax differences (BTDs), measured as the ratio of taxable income to book income, TI/BI. Low TI/BI predicts worse earnings growth and abnormal stock returns than high TI/BI. We find that short sellers and insiders arbitrage BTD mispricing, but the arbitrage is imperfect because of constraints on short selling and insider trading. Under SFAS No. 109 the predictability is stronger for TEMP/BI, the temporary component of TI/BI, which reflects greater managerial discretion. The results are incremental to a large set of known accruals-based anomaly predictors. We suggest that a sunshine policy of disclosing a reconciliation of book and taxable incomes can reduce mispricing of BTDs and improve capital market resource allocation. Data Availability: Data are obtained from the public sources as indicated in the text.

scholarly journals The Relationship of Insider Trading Announcements, Ownership Structure and Corporate Governance: An Event Study Analysis of Athens Stock Exchange Market Technology Firms

2019 ◽  
Vol 11 (7) ◽  
pp. 13 ◽  
Author(s):  
Ioannis Antoniadis ◽  
Christos Gkasis ◽  
Stamatis Kontsas
Keyword(s):  
Corporate Governance ◽  
Stock Returns ◽  
Event Study ◽  
Insider Trading ◽  
Boards Of Directors ◽  
Stock Exchange ◽  
Time Windows ◽  
Abnormal Stock Returns ◽  
Athens Stock Exchange ◽  
The Relationship

In the present paper, the relationship between corporate governance mechanisms of a firm and stock returns triggered by insider trading announcements is examined. Event study methodology has been used to evaluate the influence of 636 insider trading announcements performed by executives of 14 listed firms in the Athens Stock Exchange, that operate in the technology sector, during the period 2007-2013. The relationship between cumulative abnormal stock returns (CARs), caused by the announcements, and corporate governance characteristics, was then examined for different time windows, both for sales and purchases of stocks by insiders. Our findings suggest that insider trading, especially in purchases, performed by CEOs and members of the Boards of Directors, has a significant effect on stock returns in the long run. More specifically concentrated ownership structures and control were found to have a negative/positive effect in abnormal stock returns of the firms only in long-term periods of time following the announcement of purchases/sales.

scholarly journals Use Of Earnings Information For Stock Pricing In Different Market Cycles: The Effect Of Discretionary Accruals

2011 ◽  
Vol 7 (5) ◽  
Author(s):  
Alireza Daneshfar ◽  
Mohammad J. Saei
Keyword(s):  
Earnings Management ◽  
Stock Returns ◽  
Stock Prices ◽  
Discretionary Accruals ◽  
Ratio Analysis ◽  
Test Results ◽  
Font Size ◽  
True Nature ◽  
Earnings Information ◽  
Abnormal Stock Returns

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">This study examines the association between stock prices and discretionary accruals in different stock market cycles and presents evidence about the discrepancy in prior research that investors were able to identify earnings management in some cases, but not in some other cases. We argue that investors&rsquo; reaction to the true nature of EPS changes may be different in different market cycles. We suggests that investors pay less attention to the nature of EPS changes in an optimistic cycle, and are more critical in neutral and pessimistic cycles. Therefore, investors are more likely to detect and count for any earnings management in a neutral or pessimistic cycle than in an optimistic cycle. Using the U.S. quarterly data from July 01, 1997 to June 29, 2001, three market cycles were identified: optimistic, neutral and pessimistic. The test results indicated that the association between discretionary accruals and abnormal stock returns were insignificant in the neutral market cycle, significant and positive in the optimistic cycle and significant and negative in the pessimistic cycle. These findings indicate that investors tend to ignore the income-increasing effect of discretionary accruals on EPS changes in an optimistic market. The finding suggests that a more delegate and technical analysis of EPS changes is required when earnings information is used for stock pricing. It also suggests that a consideration of market cycle effect on investors&rsquo; use of EPS could improve the earnings-based ratio analysis. The findings propose that researchers interested in investigating the association between stock prices and earnings management should control for the effect of the market cycle during which their samples are drawn. </span></span></p>

scholarly journals Earnings Management Effect In Different Stock Market Cycles

2011 ◽  
Vol 7 (8) ◽  
Author(s):  
Alireza Daneshfar ◽  
Daniel Zeghal ◽  
Mohammad J. Saei
Keyword(s):  
Stock Market ◽  
Earnings Management ◽  
Stock Returns ◽  
Stock Prices ◽  
Discretionary Accruals ◽  
Test Results ◽  
Font Size ◽  
True Nature ◽  
Abnormal Stock Returns ◽  
Management Effect

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">This study examines the association between stock prices and discretionary accruals in different stock market cycles. The study presents evidence for a discrepancy in prior research and shows that investors are able to identify earnings management only in some cases. We argue that investors&rsquo; reaction to the true nature of EPS varies in different market cycles. We suggests that investors pay less attention to the nature of EPS changes in an optimistic cycles, and are more critical in neutral or pessimistic cycles. Therefore, investors are more likely to detect and count for any earnings management in the neutral or pessimistic cycle than in the optimistic cycle. The test results indicated that the association between discretionary accruals and abnormal stock returns were insignificant in the neutral market cycle, significant and positive in the optimistic cycle and significant and negative in the pessimistic cycle. These findings indicate that investors tend to ignore the income-increasing effect of discretionary accruals on EPS changes in an optimistic market. The findings suggest that researchers investigating the association between stock prices and earnings management should control for the type of the market cycle from which their samples are drawn. </span></span></p>

scholarly journals Earnings Management Incentives and the Pricing of Discretionary Accruals

2019 ◽  
Vol 14 (7) ◽  
pp. 77
Author(s):  
Sondes Draief
Keyword(s):  
Earnings Management ◽  
Stock Returns ◽  
Cash Flow ◽  
Insider Trading ◽  
Financial Distress ◽  
Negative Relationship ◽  
High Growth ◽  
Discretionary Accruals ◽  
Free Cash Flow ◽  
Management Incentives

The objective of this research is to investigate whether earnings management incentives influence the pricing of discretionary accruals. Specifically, we verify if growth opportunity, leverage, free cash flow, insider trading and financial distress are useful to investors to discriminate between opportunistic and informative earnings management. Using a sample of 486 American firms for the period 2002-2010, we find that discretionary accruals are positively related to stock returns. This relation is more intensive in high growth firms and high levered firms. Indeed, these firms use more informative earnings management to communicate future prospects and good financial situation to external investors. However, discretionary accruals are negatively priced by investors in distressed firms. These firms have a greater incentive to manage earnings opportunistically to hide any financial problem. Likewise, we detect a negative relationship between discretionary accruals and stock returns in firms with excessive free cash flow revealing the opportunistic perspective of earnings management. Finally, we demonstrate that investors award positive (negative) value to discretionary accruals in case of insider buying (selling).

Executive Stock Options and Earnings Management: A Theoretical and Empirical Analysis

2016 ◽  
Vol 06 (02) ◽  
pp. 1650003 ◽  
Author(s):  
Ohad Kadan ◽  
Jun Yang
Keyword(s):  
Theoretical Model ◽  
Earnings Management ◽  
Stock Returns ◽  
Empirical Analysis ◽  
Insider Trading ◽  
Stock Price ◽  
Stock Options ◽  
Executive Stock Options ◽  
Strongly Correlated ◽  
Restricted Stock

We study the effect of the grants of executive stock options (ESOs) and restricted stock on earnings management and insider trading during the vesting years of these grants. In our theoretical model, an informed manager compensated by stock options is mandated to issue an earnings report. Uninformed investors price the stock based on this report. The manager can manipulate the report to affect the stock price, but earnings management is costly to the manager. The optimal report balances the benefits from exercising stock options and the costs of earnings management. Earnings management and insider trading occur at the vesting date only if the options are in the money post manipulation, and are intensified by larger grants. The model identifies three major determinants of the extent of both earnings management and insider trading: The moneyness of the options at the vesting date, the size of the grants, and cumulative stock returns between the grant date and the vesting date. Our empirical results confirm that the moneyness of newly granted stock options and cumulative stock returns are strongly correlated with both earnings management and insider trading in vesting years. In contrast, the size of the grants is only weakly related to earnings management and insider trading in vesting years.

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