Perceived Accounting Quality and the Information Content of Prior Insider Trades

We examine how shocks to perceived accounting quality lead to market prices that reflect an increased weighting on prior disclosures of insider trading. Using a sample of firms where industry peers have restated financial information, we find that the short-term market reaction to announcements of restatements by industry peers is significantly more negative for companies with recent insider net selling than for companies with recent insider net buying. We also find that recent insider trading signals are more informative to investors in situations characterized by greater information asymmetry prior to a peer restatement and when the peer restatement is an intentional misstatement. Our findings suggest that insider selling disclosures are an important source of information when perceived accounting quality is low and that a significant portion of the intra-industry information transfers arising from peer restatements is due to a reweighting of other information.