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Insider trading restrictions and earnings management

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  • Beatriz Garcia Osma
  • Elvira Scarlat
  • Karin Shields

Abstract

We study whether firms that voluntarily restrict insider trading have lower incentives for earnings management. Using a large sample of US firms, we measure these restrictions based on the extent to which insider transactions happen shortly after quarterly earnings announcements. We find that the adoption of insider trading restrictions is associated with a reduction of 9.92% in absolute discretionary accruals. Our findings are robust to controlling for changes in corporate governance, and we do not find evidence of a substitution effect between accruals and real earnings management, target beating or timeliness of loss recognition. Taken together, our results indicate that the voluntary adoption of blackout periods that limit insider trading improves the quality of financial reporting.

Suggested Citation

  • Beatriz Garcia Osma & Elvira Scarlat & Karin Shields, 2020. "Insider trading restrictions and earnings management," Accounting and Business Research, Taylor & Francis Journals, vol. 50(3), pages 205-237, April.
    • Handle: RePEc:taf:acctbr:v:50:y:2020:i:3:p:205-237
    DOI: 10.1080/00014788.2020.1712650
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    Cited by:

    1. Hu, Fang & Kusnadi, Yuanto & Wang, Jiwei & Wang, Yujie, 2022. "Insider trading restrictions and real activities earnings management: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    2. Clacher, Iain & Garcia Osma, Beatriz & Scarlat, Elvira & Shields, Karin, 2021. "Do commonalities facilitate private information channels? Evidence from common gender and insider trading," Journal of Corporate Finance, Elsevier, vol. 70(C).
    3. Ahsan Habib & Dinithi Ranasinghe & Julia Yonghua Wu & Pallab Kumar Biswas & Fawad Ahmad, 2022. "Real earnings management: A review of the international literature," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(4), pages 4279-4344, December.

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