Corporate transparency and insider trading profitability: Evidence from voluntary adoption of clawback provisions and insider trading profitability

Abstract

We examine whether clawback provisions allowing recovery of excess pay based on manipulated earnings reduce managers’ information advantage, restricting their insider trading. We find that managers’ trading profits decrease after clawback adoption. Such effect is more prominent in firms with lower financial reporting quality before clawback adoption and is moderated by opportunistic managerial traits. We also find that clawback adoption induces greater concentration of managers’ equity sales in a small window right after disclosure of positive guidance or positive unexpected earnings not inflated by earnings manipulation, enhancing their equity sales proceeds without appearing to exploit private information.