Information trading by corporate insiders based on accounting accruals: Forecasting economic performance

In this paper, we test whether directors' (corporate insiders) trading in Australia, based on accounting accruals, provides incremental information in forecasting a firm's economic performance. We determine that directors' trading on negative accruals in larger firms has greater forecasting content and is associated with 1-year-ahead bull market phases. Moreover, arbitrage portfolios set up to mimic insider trading can earn 1-year-ahead excess size-adjusted arbitrage returns of up to 12.2 per cent. Results are consistent with directors hiding their trades in liquid well-traded firms and in providing incremental information above that supplied by a continuous information regime. © 2006 AFAANZ