Do investors trade on the edge? Evidence from insider trades in Vietnam stock market

Abstract

This study investigates the relationship between insider trading and managerial discretion in the context of the young and fast-growing Vietnam stock market. Using alternative estimates of discretionary accruals quality (DACCR) as proxies for managerial discretion, we find strong evidence that net insider purchase is negatively associated with managerial discretion. This relationship is transformed from a dynamic inverted U-shaped relation between current DACCR and net insider purchase in the preceding year, implying that insider selling behaviour is deliberate in long-term and is supported by accrual abuse. More importantly, we find that net insider purchase is informative about future income-increasing DACCR, but not about future income-decreasing DACCR. Our evidence suggests that insiders adjust their trading behaviour from selling to buying during the two-year period preceding the release of financial information and mislead market about the prospect of the firm. In other words, insiders tend to expropriate on outside investors and avoid legal scrutiny at the same time. We also document a severe measurement error in accruals quality estimation of the balance sheet approach which inflates the value of DACCR estimates and subjects to Type I error. Consequently, our findings insinuate that without access to private information and under poor investor protection, outside investors trade on the edge.