Abstract:
We show that opportunistic insiders can be identified through the profitability of their trades prior to quarterly earnings announcements (QEAs), and that opportunistic trading is associated with various kinds of firm/managerial misconduct. A value-weighted trading strategy based on (not necessarily pre-QEA) trades of opportunistic insiders earns monthly 4-factor alphas of over 1% — much higher than in past insider trading literature and substantial/significant even on the short side. Firms with opportunistic insiders have higher levels of earnings management, restatements, SEC actions, shareholder litigation, options backdating, and executive compensation. These findings suggest that opportunism is a domain-general trait.
