Insider trading conveys insiders’ private information to outsiders. This private information potentially benefits rival firms, which may reduce the competitive advantage of the insiders’ firms. Using a composite proprietary cost measure, we find proprietary costs are negatively associated with insiders’ purchases, especially when their trades are more likely to be informative to rivals. Consistent with proprietary costs increasing the costs of insider purchases and, hence, the expected benefits required to trade, insiders earn significantly higher abnormal profits when proprietary costs are higher. Exploiting settings with exogenous and event-driven variation in proprietary costs, we find insiders significantly reduce their purchases when noncompete agreement enforceability is high and before new product launches. Moreover, firms with higher proprietary costs are more likely to impose window-based insider trading restrictions and insiders with greater equity holdings reduce their purchases more strongly in the presence of proprietary costs. Finally, we provide evidence of real effects of insider trading on rivals’ investment decisions. We find that investments are associated with insiders’ purchases at rival firms, and these associations are stronger when proprietary costs at rivals are higher. Our findings indicate insiders and firms are aware of potential proprietary costs when insiders trade on private information, and respond accordingly.

We build a novel comprehensive data set of new product trademarks as an output measure of product development innovation. We show that risk-taking incentives in CEO compensation motivate this type of innovation and that this innovation improves firm performance. Using an exogenous shock to executive compensation, we find that reductions in stock option compensation cause reductions in new product development. We also find that firms undertaking new product development experience increases in future cash flow from operations and return on assets. These findings suggest the importance of product development innovation to firms and new trademarks as a novel innovation measure.

Prior studies document the role social media information plays in the stock market and the important dissimilarities between the bond and stock markets. Bridging these two types of literature, we examine the role of social media information in the corporate bond market. Analyzing a broad sample of messages by Twitter individual users, posted just prior to earnings announcements, containing bond, credit risk, and fundamental information, we find that aggregate Twitter opinion (OPI) predicts upcoming announcement bond returns and changes in credit default swap (CDS) spreads, and is associated with future changes in bond yield spreads and credit ratings, thereby providing economically important information to the bond market. This interpretation is bolstered by results from a variety of cross-sectional analyses. Finally, we document an association between OPI and future changes in default risk, which casts light on the nature of the Twitter information underlying our findings. Overall, our findings demonstrate that Twitter appears to disseminate potentially economically important information to even the presumably sophisticated bond and CDS investors, as well as information intermediaries. This paper was accepted by Suraj Srinivasan, accounting. Funding: P. Mohanram acknowledges financial support from the Social Sciences and Humanities Research Council (SSHRC) of Canada. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4589 .

This paper examines the association between insider trading prior to quarterly earnings announcements and the magnitude of the post-earnings announcement drift (PEAD). We conjecture and find that insider trades reflect insiders' private information about the persistence of earnings news. Thus, insider trades can help investors better understand and incorporate the time-series properties of quarterly earnings into stock prices in a timely and unbiased manner, thereby mitigating PEAD. As predicted, PEAD is significantly lower when earnings announcements are preceded by insider trading. The reduction in PEAD is driven by contradictory insider trades (i.e., net buys before large negative earnings news or net sells before large positive earnings news) and is more pronounced in the presence of more sophisticated market participants. Consistent with investors extracting and trading on insiders' private information, pre-announcement insider trading is associated with smaller market reactions to future earnings news in each of the four subsequent quarters. Overall, our findings indicate insider trading contributes to stock price efficiency by conveying insiders' private information about future earnings and especially the persistence of earnings news.

New product development is critical for firms to achieve and maintain growth and performance. We build a novel dataset of 123,545 USPTO trademark registrations by S&P 1500 firms from 1993 to 2011 to study whether and how CEO compensation risk incentives motivate new product development. Using the OECD’s broad definition of innovation that includes new product development, our tests offer evidence on how risk incentives affect innovation of new products. We find that the number of trademarks increases with the fraction of compensation in the form of stock options, the convexity of incentives, and unvested stock options, both in low-patent (non-high-tech) and high-patent (high-tech) industries. Using a revised accounting rule, SFAS 123(R), as an exogenous shock, we find that reductions in stock option compensation cause reductions in trademark creation. Overall, the evidence indicates that CEO risk-taking incentives are important drivers of product development.

Prior research has examined how companies exploit Twitter in communicating with investors, and whether Twitter activity predicts the stock market as a whole. We test whether opinions of individuals tweeted just prior to a firm's earnings announcement predict its earnings and announcement returns. Using a broad sample from 2009 to 2012, we find that the aggregate opinion from individual tweets successfully predicts a firm's forthcoming quarterly earnings and announcement returns. These results hold for tweets that convey original information, as well as tweets that disseminate existing information, and are stronger for tweets providing information directly related to firm fundamentals and stock trading. Importantly, our results hold even after controlling for concurrent information or opinion from traditional media sources, and are stronger for firms in weaker information environments. Our findings highlight the importance of considering the aggregate opinion from individual tweets when assessing a stock's future prospects and value.

SYNOPSIS This study examines quantitative long-term earnings growth (LTG) forecasts issued by publicly traded firms. While the difficulty of verifying management LTG forecasts provides incentives for self-serving disclosures, we find that stakeholder interests and forecast credibility considerations significantly constrain such tendencies. In particular, we find that demand from market participants, information asymmetry, peer LTG forecast provision, product market competition, and industry profitability drive management LTG forecast issuance, while poor performance and high uncertainty over firm growth prospects deter management LTG forecast issuance. Moreover, we provide evidence that management LTG forecasts, on average, provide incremental information about future earnings growth, and that high competition and investor monitoring increase LTG forecast informativeness, consistent with predictions of theoretical cheap talk models. Our findings also indicate that both upward and downward LTG guidance provide incremental information about future earnings growth, and that analysts revise their LTG forecasts in the direction of LTG guidance. Overall, our study contributes to the voluntary disclosure literature by providing evidence that suggests elements of a firm's disclosure environment significantly influence the issuance and informativeness of difficult-to-verify disclosures. JEL Classifications: C23; D81; D82; M41.

Prior literature documents a positive (negative) relation between past (future) stock returns and both external financing and capital expenditures. In this study, we examine whether managers’ financing and capital expenditure decisions are associated with firm-level investor favoritism (neglect) and, therefore, whether managers exploit investor mispricing by issuing more (less) capital and investing more (less) in capital expenditures when firm-level investor sentiment is high (low), which leads to more negative future stock returns. We employ both a stock’s extreme return momentum and extreme trading volume to capture firm-level investor favoritism (neglect), which reflects firm-level investor overpricing (underpricing) due to investor sentiment. We find that both external financing and capital expenditure decisions are positively (negatively) associated with favoritism (neglect) and that the previously documented negative association between future stock returns and external financing is more pronounced in periods of favoritism. However, we find no association between future stock returns and capital expenditures after controlling for external financing. These findings suggest that managers’ financing and capital expenditure decisions are associated with firm-level investor favoritism/neglect, and that managers exploit investor mispricing in making financing decisions, resulting in lower future stock returns.

We document negative stock returns and elevated trading volumes around executives' early option exercise disclosures post-SOX, but not pre-SOX. This stock price reaction is incomplete, and the negative stock price drift is smaller post-SOX compared to pre-SOX. We also show effects of media coverage in the stock price response to exercise disclosures in the post-SOX period. These findings provide evidence that the requirement mandated by SOX to disclose executives' stock option exercises within two business days, and the increased media coverage, improves investors' ability to incorporate into stock prices in a timely fashion the information conveyed by these exercises.

This paper examines the association between insider trading during the pre-earnings announcement period and the magnitude of the post-earnings announcement drift (PEAD). Consistent with insiders’ private information being incorporated into prices through their trading, we find PEAD is significantly lower when earnings announcements are preceded by insider trading. This negative association between insider trading and PEAD is stronger when information asymmetry between insiders and outsiders is higher, and when internal and external monitoring of insider trades is weaker. However, in contrast to our primary results, we find that in cases of confirming insider trading (i.e., high levels of insider buying (selling) preceding large positive (negative) earnings surprises), PEAD is significantly larger. Our evidence suggests such trades are based on insiders’ private information about earnings surprises in subsequent quarters and the market fails to fully account for the information contained in these trades. Overall, our findings indicate insider trading contributes to stock pricing efficiency by conveying insiders’ private information to the market.

We introduce trademarks as a new measure of innovation output, and examine the relation between CEO incentives and trademarks in a broad set of industries. Our new dataset contains over 123,545 USPTO trademark registrations by S&P 1500 firms from 1993 to 2011. As compared with patents, trademarks measure innovation over a wider range of industries and focus on the development portion of innovation that culminates more immediately as new products and services. We find that, on average, firms with more new product trademarks have more volatile stock returns, sales, and earnings after relevant controls, consistent with new trademarks being an indicator of risky product development innovation. We find that the fraction of CEO pay in the form of stock options, the convexity of CEO incentives, and the amount of unvested stock options held by the CEO are strongly positively associated with future trademarks. We also examine subsets of industries based on their patent production, and find generally similar results for all levels of patent-intensive industries. Finally, we document a positive relation between changes in stock option compensation around the implementation of SFAS 123(R) and subsequent changes in trademark creation, suggesting that stock option compensation is an important driver of product development innovation.

This study examines the issuance of long-term earnings growth (LTG) forecasts by managers. We find that managers issue LTG forecasts when firms have high growth prospects, more LTG guidance among industry peers, and greater demand for growth information by analysts. News conveyed by LTG forecasts appears to guide analysts closer to realized future growth rates and analysts generally revise their LTG forecasts in the direction of guidance. Nevertheless, consistent with an awareness of their own optimistic bias, analysts do not significantly respond to upward LTG guidance when guidance is issued outside of earnings announcement windows. When we consider the relation of LTG guidance to concurrent disclosures at earnings announcement, we find that upward guidance relates strongly to positive short-term earnings news that is quantitative in nature, whereas downward guidance relates more strongly to forwardlooking qualitative information that conveys a relatively upbeat tone about the future. Therefore, our findings suggest that the nature of LTG guidance “bundling” with concurrent disclosures depends on the sign of the news conveyed by the guidance. JEL Classification: C23; D81; D82; M41.

ABSTRACTContingent considerations (earnouts) in acquisition agreements provide sellers with future payments conditional on meeting certain conditions. Prior research provides evidence that acquiring firms use earnouts to minimize agency costs associated with acquisitions. Using earnout fair value information, recently mandated by SFAS 141(R), we provide new insights into the economic determinants to include earnout provisions in acquisition agreements, including motivations to resolve moral hazard and adverse selection problems, bridge valuation gaps, and retain target firm managers. We document variations in initial earnout fair value estimates and earnout fair value adjustments that correspond with these underlying motivations. We also provide evidence that target managers stay longer with the firm after the acquisition when earnouts are included primarily to retain target managers. Finally, we demonstrate that earnout fair value adjustments required by SFAS 141(R) provide valuable information to market participants and are negatively associated with the likelihood of contemporaneous and future goodwill impairments.

Investors face difficulty incorporating expected loss persistence into their valuation of loss firms. This study examines whether insiders have private information about loss persistence and trade upon such information by analyzing insider trading patterns before the end of a loss string. We find that stock purchase (sales) by insiders increase (decrease) one to five quarters prior to the announcement of loss reversals. Moreover, this increase (decrease) in stock purchases (sales) only occurs with opportunistic trades not with routine trades. We further find economically significant abnormal returns associated with insider buying over the period from the time of insider trade until the loss reversal is announced. While Ke et al. [2003] find that insiders sell far ahead of announcing bad news to avoid the appearance of trading on earnings news, our findings suggest asymmetric litigation risks perceived by insiders when trading on good news. ∗Arizona State University, W.P. Carey School of Business †University of California Irvine, The Paul Merage School of Business ‡Arizona State University, W.P. Carey School of Business

SFAS 141(R) requires firms to recognize the fair value of contingent considerations (“earnouts”) included in acquisition agreements. This new accounting standard alters the information environment surrounding earnouts and impacts the acquiring firms’ financial statements. We find that fair value estimates and subsequent fair value adjustments of earnout provisions provide valuable information to market participants beyond the financial statement effects. We also document that the use of earnout provisions increased following the adoption of SFAS 141(R), on average, while use by acquiring firms with greater financial reporting concerns declined. Together, our results provide evidence that fair value disclosures help reconcile information asymmetries between insiders and market participants, and shed light on the influence of accounting standards on contract design.

Contingent considerations (“earnouts”) in acquisition agreements provide sellers with future payments conditional on meeting certain conditions. Prior research provides evidence that acquiring firms use earnouts to minimize agency costs associated with acquisitions. Using earnout fair value information recently mandated by SFAS 141(R), we provide new insights into the economic determinants to include earnout provisions in acquisition agreements including motivations to resolve moral hazard and adverse selection problems, bridge valuation gaps, and retain target firm managers. We document variations in initial earnout fair value estimates and earnout fair value adjustments that correspond with these underlying motivations. We also provide evidence that target managers stay longer with the firm after the acquisition when earnouts are included primarily to retain target managers. Finally, we demonstrate that earnout fair value adjustments required by SFAS 141(R) provide valuable information to market participants and are negatively associated with the likelihood of contemporaneous and future goodwill impairments.

We investigate how managers contribute to the provision of earnings guidance by examining the association between top executive turnovers and guidance. Although firm and industry characteristics are important determinants of guidance, we conclude that CEOs participate in firm-level policy decisions, whereas CFOs are involved in the formation or discussion of guidance. Among firms that historically issued frequent guidance, breaks in guidance following CEO turnovers are relatively permanent and are potentially attributable to firm-initiated changes in guidance policy. Breaks following CFO turnovers, however, likely reflect uncertainty on the part of the newly appointed executive-they are concentrated in the two quarters following the turnover, are associated with the background of the newly appointed CFO, and extend to the relative precision of the guidance. Among firms that did not issue guidance historically, we find some evidence that newly appointed externally hired CEOs increase the likelihood of providing guidance.

We document a market failure to fully respond to loss/profit quarterly announcements. The annualized post portfolio formation return spread between two portfolios formed on extreme losses and extreme profits is approximately 21 percent. This loss/profit anomaly is incremental to previously documented accounting-related anomalies, and is robust to alternative risk adjustments, distress risk, firm size, short sales constraints, transaction costs, and sample periods. In an effort to explain this finding, we show that this mispricing is related to differences between conditional and unconditional probabilities of losses/profits, as if stock prices do not fully reflect conditional probabilities in a timely fashion. & 2009 Elsevier B.V. All rights reserved.

Prior research documents negative stock returns after corporate insiders' early stock option exercises in periods prior to the enactment of the Sarbanes-Oxley Act of 2002 (SOX), and interprets this evidence as suggesting that negative private information underlies early exercises. This study examines whether investors use corporate insiders' early option exercises as signals for firms’ future prospects. Regulatory changes mandated by SOX requiring corporate insiders to report option exercises to the SEC within two business days, effective on August 29, 2002, affords us an opportunity to investigate this question. Studying a sample of CEOs' early option exercises from the post-SOX era, we fail to document an immediate stock price response to option exercise disclosures. In an attempt to explain this finding, we analyze firms' stock price behavior in the post-exercise period. Long window return tests and short window earnings announcement return tests suggest that corporate insiders' option exercises are informative about future stock prices and future earnings, respectively. One interpretation of our findings is that in the post-SOX era CEOs' early option exercises are informative, but investors largely overlook the information they convey.