Market Reactions to Insider Trading Prior to Corporate Earnings Disclosure. Does Executive Pay Disparity Play Any Role?

This paper investigates the impact of firms’ executive pay disparity on insider trading returns prior corporate earnings disclosures. We find evidence that executive pay disparity has a significant positive relationship with abnormal returns from insider purchases preceding the good earnings news disclosures, and insider returns are greater for firms with higher earnings surprises. This implies that insiders in high CEO pay gap firms tend to exploit good earnings news to increase the profit in their stock-buying transactions. In contrast, we find a negative relationship between executive pay disparity and abnormal returns of insider sales preceding the bad earnings news disclosures. This indicates that insiders in high CEO pay gap firms are less likely to profit from their stock sales. Our empirical research also provides further evidence to the literature that insider trading is a plausible signal for future earnings of the firms.