Insiders' Rule 10b5-1 plan sales and earnings management

Date of Completion

January 2007


Business Administration, Accounting|Law|Economics, Finance




This dissertation examines whether insiders manage quarterly earnings in connection with their SEC Rule 10b5-1 plan stock sales. Prior research provides evidence of competing incentives regarding the timing of insider stock sales. For example, insiders can (1) sell after they have managed earnings upward ("pump-and dump") or (2) manage earnings upward after they have sold ("litigation avoidance"). Rule 10b5-1(c) reduces the litigation avoidance incentive by providing an insider with an affirmative defense against insider trading charges if the insider, at a time when the insider had no material inside information, commits in advance to a stock sale plan. The study of Rule 10b5-1 sales, which are typically pre-planned, also helps overcome an obstacle in prior literature as to whether the decision to sell occurred before or after the earnings announcement. ^ Consistent with prior research, I find evidence that insiders sell after meeting or beating quarterly analyst forecasts, consistent with a pump-and-dump strategy. On the other hand, I find some evidence that insiders increase quarterly accrual-based measures after selling, consistent with a litigation avoidance strategy. I also find extensive evidence that insiders reduce accrual-based measures before selling, arguably consistent with a litigation avoidance strategy. However, I find very little evidence of a differential effect for sales made under a 10b5-1 plan versus sales made outside a 10b5-1 plan. This dissertation also offers recommendations for the SEC in connection with 10b5-1 plans. ^