Analysts' earnings forecasting activities around insider trades: Implications for analyst efficiency and market efficiency

This dissertation examines analysts' earnings forecasting activities around insider transactions and the implications of such activities for both analyst forecast inefficiency and market price inefficiency with respect to insider trading information. I find that analysts underreact to insider trading signals. This underreaction is largely driven by the informative insider trades ignored by analysts (i.e., insider trades without nearby analysts' annual earnings forecasts). The informativeness test shows that ignored insider trades are as predictive of future earnings numbers as the insider trades attended to by analysts (i.e., insider trades with nearby annual earnings forecasts). Moreover, the ignored insider trading information is not fully incorporated in stock prices while stock prices do fully incorporate the insider trading information attended to by analysts. Additional tests show that both analyst earnings forecasts and stock prices fully incorporate the insider trading information attended to by analysts only when this information is inconsistent with other information as represented by the direction of nearby forecast revisions. An inconsistency between insider trading information and forecast revisions refers to cases where insider buys (sells) are not accompanied by upward (downward) forecast revisions. Taken together, these results support the view that while analysts do not attend to all informative insider trades, their attendance to insider trades is related to higher analyst forecast efficiency and higher market efficiency with respect to the information in such trades. Further, I expect and find that analyst attendance to insider trades systematically varies with several insider and firm characteristics.