Informed Trading and the Market Reaction to Accounting Restatements

This study examines how informed trading activities, such as share repurchases and issuances and insider buying and selling, affect the market reaction to accounting restatements. We document significantly less negative reactions to accounting restatements when managers invest in their own stock through corporate or personal purchases of company stock, and more negative reactions when managers sell stock or issue equity prior to the restatement. This result is incremental to the general tendency of stocks to drift upwards (downwards) following repurchases and insider buying (issuances and insider selling). Our results suggest that informed trading mitigates the increase in information risk that typically accompanies accounting restatements and provides new evidence on the information that investors use to interpret and price accounting restatements.