Are All Insider Sales Created Equal? Evidence from Form 4 Footnote Disclosures

This paper is the first to examine the information contained in executives’ voluntary supplementary disclosures in footnotes on SEC Form 4 filings that accompany stock sales. Analysing these supplementary disclosures we are able to distinguish between discretionary sales, for which insiders have discretion over the amount and timing of the sale, and nondiscretionary sales. We find that discretionary sales involve significantly larger trades and produce significantly lower abnormal announcement returns than nondiscretionary sales, particularly when internal controls are perceived to be weak. Our findings suggests that discretionary sales reveal negative information to investors who do not seem to fully impound the information into stock prices in a timely manner as these sales are predictive of negative future stock returns. Investigating the type of bad news that these insider sales predict, we find a positive association with the likelihood of future analyst downgrades, negative earnings surprises and future litigation.