Francois Brochet

Information Content of Insider Trades Before and After the Sarbanes-Oxley Act

This paper examines the information content of Form 4 filings under the more timely disclosure regime introduced by Section 403 of the Sarbanes-Oxley Act of 2002 (SOX). Abnormal returns and trading volumes around filings of insider stock purchases are significantly greater after SOX than before. Abnormal trading volumes around filings of insider sales are also greater post-SOX on average, but stock returns are not more negative. However, once controlling for pre-planned transactions, reporting lag, litigation risk, and news following insider trades, I also find a negative association between returns around filings of insider sales and SOX. Overall, the evidence suggests that the prompt public disclosures about insider transactions mandated by the new rule are relevant to the pricing of securities. The results are also consistent with SOX and regulatory actions reducing the incentives to sell ahead of privately known negative news.

Mandatory IFRS Adoption and Financial Statement Comparability

This study examines whether mandatory adoption of International Financial Reporting Standards (IFRS) leads to capital market benefits through enhanced financial statement comparability. UK domestic standards are considered very similar to IFRS (Bae et al. 2008), suggesting any capital market benefits observed for UK-domiciled firms are more likely attributable to improvements in comparability (i.e., better precision of across-firm information) than to changes in information quality specific to the firm (i.e., core information quality). If IFRS adoption improves financial statement comparability, we predict this should reduce insiders’ ability to benefit from private information. Consistent with these expectations, we find that abnormal returns to insider purchases ― used to proxy for private information ― are reduced following IFRS adoption. Similar results obtain across numerous subsamples and proxies used to isolate IFRS effects attributable to comparability. Together, the findings are consistent with mandatory IFRS adoption improving comparability and thus leading to capital market benefits by reducing insiders’ ability to exploit private information.

Speaking of the Short-Term: Disclosure Horizon and Managerial Myopia

We study conference calls as a voluntary disclosure channel and create a proxy for the time horizon that senior executives emphasize in their communications. We find that our measure of disclosure time horizon is associated with capital market pressures and executives’ short-term monetary incentives. Consistent with the language emphasized during conference calls partially capturing short-termism, we show that our proxy is associated with earnings and real activities management. Overall, the results show that the time horizon of conference call narratives can be informative about managers’ myopic behavior.

The Predictive Value of Accruals and Consequences for Market Anomalies

In this article, the authors revisit the role of the cash and accrual components of accounting earnings in predicting future cash flows using out-of-sample predictions and market value of equity as a proxy for all future cash flows. They find that, on average, accruals improve upon current cash flow from operations (CFO) in predicting future cash flows. In the cross-section, accruals’ contribution is positively associated with proxies for quality of accruals and governance. Next, the authors investigate the implications of accruals’ predictive value for accrual-based market anomalies. They find that portfolios formed on stock return predictions using information from current CFO and accruals yield significantly positive returns on average, as opposed to CFO alone. They also find that Sloan’s accrual anomaly is related to our accrual contribution anomaly. Indeed, when accruals’ contribution to future cash flow prediction is the highest, the accrual anomaly vanishes. Collectively, the results suggest that the predictive value of accruals and market participants’ ability to process it are a significant driver of accrual-based anomalies.

Top Executive Background and Financial Reporting Choice

We study the role of executive functional background in explaining management discretion in financial reporting. Taking goodwill impairment as our reporting setting, we focus on top executives (CEOs and CFOs) whose employment history includes experience in investment banking, private equity, venture capital or management consulting, as we expect these executives to have unique human capital and reputation concerns with respect to acquisitions and valuation modeling related to fair-value reporting. On average, we document that CFOs with prior transaction experience impair goodwill more frequently and in smaller amounts than other executives. Further investigation suggests that CFOs with prior transaction experience report goodwill that is more value relevant. This is consistent with CFO valuation expertise helping impair goodwill in a more informative manner. In contrast, CEOs with prior transaction experience appear to be subject to agency conflicts that affect their propensity to impair goodwill. Overall, our results not only suggest that executive functional background is a significant explanatory factor of financial reporting discretion, but also that a better understanding of its effect relies upon analyses of specific settings and predictions grounded in upper echelons theory and agency theory.

Market Valuation of Anticipated Governance Changes: Evidence from Contentious Shareholder Meetings

We define annual shareholder meetings as contentious if one or more ballot items are likely to obtain sufficient shareholder votes to induce a firm to implement governance changes. Using a sample of almost 28,000 meetings between 2003 and 2012, we find that abnormal stock returns over the 40-day period prior to contentious meetings are significantly positive and higher than prior to non-contentious meetings. These higher abnormal returns persist after controlling for firm-specific news and proxies for risk factors and are more pronounced in firms with poor past performance. Our results are consistent with investors viewing an increase in the probability of shareholder vote-induced governance changes as value creating, on average.

Aggregate Insider Trading and Market Returns: The Role of Transparency

Using a sample of countries that require timely disclosures of insider trades, I investigate the effect of country‐level institutions that promote transparency on the extent to which aggregate insider trades predict market returns. I find that financial information transparency mitigates the predictive content of aggregate insider trades when markets are more likely to deviate from fundamentals (i.e., during market fads), and when there is greater co‐movement in stock prices. In contrast, there is some evidence that governance and investor protection mitigate the association between aggregate insider trades and future earnings surprises. Hence, holding constant the timely disclosures of insider trades, other capital market institutions play complementary roles in mitigating the informational frictions that give rise to the predictive content of aggregate insider trades.