| The increase in financial statement restatements in recent years has spurred attention from market participants, academics, and regulators. This thesis is motivated by this interest and investigates insider trading in firms with an accounting violation. In this setting, insiders have the choice to trade and realize a potential profit or abstain and limit their legal exposure.;The first essay examines the extent to which the ex ante risk of litigation affects insider trading behavior in a sample of firms restating earnings due to revenue recognition issues. Insider selling is decreasing in the estimated litigation, suggesting that insiders consider the legal risk in their trading decisions and forego trades to avoid future negative consequences. Interestingly, the results are driven by insiders of firms where no allegation of fraud emerges. However, insider trades do not seem to affect the probability of litigation ex post.;The second essay examines the interesting episodes surrounding a misstatement and its public disclosure and investigates how insider trading changes over the different time periods. My tests detect no abnormal insider trading before and during the misstatement. Starting with the discovery, insiders decrease net selling. This behavior continues well after the public disclosure of the misstatement.;These results should be useful to researchers and professionals who are interested in managers' behavior in firms with accounting problems and litigation as a factor that influences executives' actions. In addition, the evidence presented in this thesis may be useful to regulators evaluating the adequacy and effectiveness of the current legal environment and insider trading regulations. |
