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Insightful Insiders? Insider Trading and Stock Return around Debt Covenant Violation Disclosures
Author(s) -
Griffin Paul A.,
Lont David H.,
McClune Kate
Publication year - 2014
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/abac.12025
Subject(s) - insider trading , covenant , debt , insider , business , stock (firearms) , monetary economics , accounting , financial system , economics , finance , law , political science , mechanical engineering , engineering
This study asks whether insider trading associates with an information advantage around first‐time debt covenant violation disclosures in SEC filings, which potentially results from early access to information about the debt covenant violation disclosure. We document two results. First, we find net insider selling up to 12 months before a debt covenant violation disclosure, which precedes investors' negative returns before disclosure; and net insider buying up to 12 months after disclosure, which precedes investors' positive returns after disclosure. Second, we show that net insider trading one to two months before and after the violation disclosure associates predictably with investors' short‐term reaction to the covenant violation announcement.