Analyst Forecasts Earnings Management and Insider Trading Patterns - Incidence and Performance Consequences

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.