The impact of insider trading on analyst coverage and forecasts

What is it about?

We examine the effect of insider trading on analyst coverage and on the properties of analyst forecasts. We find that the level of analyst coverage is positively related to the intensity of insider trades and that analyst coverage is more strongly associated with insider purchases than with insider sales. We also find that the positive association between analyst coverage and insider trades is less pronounced after the passage of Regulation Fair Disclosure. Further investigations reveal that: (i) analysts revise their earnings forecasts upwards following insider purchases, (ii) the informativeness of analyst forecast revisions significantly increases following insider purchases, and (iii) optimistic bias in analyst forecast revisions is reduced as a result of insider purchases; we do not find similar evidence for insider sales. Our study contributes to understanding the role that insider trading may play in shaping analyst behaviour.

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