Management Earnings Forecast Bias and Insider Trading : Comparison of Distressed and Non-Distressed Firms

This study investigates the association between bias in earnings forecasts released by managers of financially distressed firms and subsequent insider trading. Prior studies have documented optimism in such forecasts. Given this finding, this study investigates whether this optimism is systematically related to opportunistic management behavior or a sincere belief (by management) that their firm's financial situation is going to get better. Abnormal insider trading in the post management forecast period is examined to test these alternative explanations. The findings for the full sample are consistent with the opportunistic view, however the trading activity of non-managerial insiders seems to be the primary driver