Identifying Opportunistic Managers Using Non-GAAP Disclosure and Insider Trading

Insiders have private information and often disclose non-GAAP earnings metrics with the claim that such metrics inform investors about earnings persistence. However, because insiders have private information about earnings persistence, they have opportunities to take advantage of this information by trading on it following non-GAAP earnings announcements. We find that insiders at firms that disclose non-GAAP earnings sell more shares of stock than insiders at other firms immediately following quarterly earnings announcements. This evidence is more pronounced for firms that: 1) Are monitored less intensively; 2) Are led by high-ability managers; and, 3) Disclose non-GAAP earnings more aggressively. Importantly, we also find that these insider sales enable managers to avoid statistically significant negative abnormal returns. Our research demonstrates the usefulness of examining both insider sales and negative abnormal return loss avoidance as approaches to identify opportunistic non-GAAP earnings disclosure, an area of difficulty for prior work. Moreover, our results suggest that regulators should consider the role of non-GAAP earnings when modifying existing insider trading rules