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Insider trading and earnings management

Posted on:2009-02-18Degree:Ph.DType:Dissertation
University:Columbia UniversityCandidate:Issaevitch, Thomas AlanFull Text:PDF
GTID:1446390002498042Subject:Business Administration
I model the effect of insider trading on earnings management using first a two-period model and then an infinite-horizon overlapping generations model. The two-period reporting setting reveals that insider trading has a qualitative effect on investor uncertainty. The infinite-horizon setting demonstrates the robustness of the two-period model to both strategic insider trading as well as multiple accounts.; Using the two-period model, I study the consequences on investor information of varying regulatory stringency (the stringency of audits and enforcement of the ban on insider trading) and accounting precision. When regulatory stringency is high, earnings management and investor uncertainty show a decrease in accounting precision (the inherent accuracy of the accounting system). When regulatory stringency is low, earnings management and investor uncertainty show an increase in accounting precision. Income smoothing is largest at low regulatory stringency while 'anti-smoothing' is largest at intermediate regulatory stringency.; Using the infinite-horizon model, I again show that earnings management decreases investor informedness for regulatory stringency below a threshold value. In the infinite horizon model, the firm never liquidates and so true fundamental value is never revealed. Instead, I assume that an independent noisy (but unbiased) analyst report is issued after the manager's insider trading and before his liquidation. I then show that the threshold regulatory stringency value is maximal for intermediate values of noise in the analyst report.
Keywords/Search Tags:Insider trading, Earnings management, Regulatory stringency, Two-period model, Show
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