Are corporate managers savvy about their stock price? Evidence from insider trading after earnings announcements q Adam Kolasinski a , Xu Li b, * ,1 a Michael G. Foster School of Business, University of Washington, 335 Mackenzie Hall, Seattle, WA 98195-3200, USA b School of Management, University of Texas at Dallas, 2601 N. Floyd Road, Office 4.427 (SM 41), Richardson, TX 75083-0688, USA article info JEL classification: G14 M41 Keywords: Insider trading Market timing Post-earnings announcement drift Underreaction anomolies abstract We find that insiders trade as if they exploit market underreaction to earnings news, buying (selling) after good (bad) earnings announcements when the price reaction to the announcement is low (high). We also find that insider trades attributable to public information about earnings and the price reaction generate abnor- mal returns. By demonstrating that managers spot market under- reaction to earnings news, our results imply that managers are savvy about their company’s stock price. Ó 2009 Published by Elsevier Inc. 1. Introduction Most studies on insider trading focus on whether insiders trade based on their private information. In contrast, we study how public information about prices and earnings influences insiders’ trading strategies. We find that insiders tend to buy more and sell less when a stock underreacts to good earn- ings news than when it underreacts to bad earnings news. Specifically, insiders engage in more net buying after release of good earnings news accompanied by a low price reaction than they do after release of bad earnings news accompanied by a high price reaction. We also find that when our model of insider trading based on public earnings and price information predicts high insider net buying in a stock, the stock subsequently experiences positive abnormal returns. We thus find evidence that 0278-4254/$ - see front matter Ó 2009 Published by Elsevier Inc. doi:10.1016/j.jaccpubpol.2009.10.004 q We are indebted to Richard Frankel, Jarrad Harford, Dirk Jenter, SP Kothari, Suresh Radhakrishnan, Jeremy Stein and Joseph Weber for their helpful comments. We also thank MIT and UT-Dallas workshop participants and participants of First Lone Star Accounting Research Conference for their helpful suggestions. We have benefited from the editor, Martin Loeb and two anonymous reviewers for their comments. We thank Bin Ke for assistance in computing abnormal returns after earnings announcements. * Corresponding author. Tel.: +1 206 543 8737. E-mail addresses: adamkola@u.washington.edu (A. Kolasinski), xu.li@utdallas.edu (X. Li). 1 Tel.: +1 972 883 6385. J. Account. Public Policy 29 (2010) 27–44 Contents lists available at ScienceDirect J. Account. Public Policy journal homepage: www.elsevier.com/locate/jaccpubpol