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In a forthcoming paper titled, "Insider Trading and the Post-Earnings Announcement Drift," authors Christina Dargenidou, Ian Tonks and Fanis Tsoligkas study the types of information conveyed to the market as a result of trading by corporate insiders following an earnings announcement. The authors study trading, following thousands of annual earnings announcements made by companies in the United Kingdom over an almost 20-year period. As a general matter, when companies announce earnings results that are lower than expected, their stock prices decline. When companies announce earnings results that are higher than expected, their stock prices increase. The authors found that when corporate insiders sell after bad news or purchase after good news, their transactions are viewed as confirmatory by the market. By contrast, when corporate insiders buy after bad news, or sell after good news which trades express contrarian views, their transactions mitigate the generally expected stock price movements. This demonstrates that the market attributes to corporate insiders information regarding whether earnings surprises are or are not representative of permanent changes in a company's prospects.
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