Insider Selling, Earnings Management, and the 1990s Bubble

Large equity grants, the hallmark of 1990s executive compensation, allegedly contributed to the 1990s stock bubble by making managers especially sensitive to stock performance and leading them to inflate earnings. Regarding these heretofore untested claims, we show that earnings are inflated before insiders sell stock, and both insider selling and earnings management surged during the bubble. Furthermore, a firm's return over the 30 months after the market's peak is negatively associated with its cumulative abnormal accruals during the bubble. More specifically, firms in the top quartile of abnormal accruals during the bubble experience an average monthly stock price correction of about ndash;1.44% (i.e., an average cumulative abnormal return of about minus;35.4%) over the 30 months of the correction period, relative to a benchmark portfolio of firms matched on size, book-to-market, and return momentum. Moreover, the association between abnormal accruals and post-bubble abnormal returns is significantly stronger for firms whose insiders were stock sellers during the bubble than for firms whose insiders were buyers