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Insider selling, earnings management, and the 1990s stock market bubble

Steven Huddart and Henock Louis

We examine allegations that sharp increases in equity-based compensation in the 1990s bubble encouraged managers to inflate earnings and that managers' reporting choices succeeded in keeping stock prices high and rising. We find that managers generally inflate earnings before selling shares. Moreover, the magnitudes of the price correction experienced by particular stocks after the bubble burst are strongly associated with the abnormal accruals the firm reported during the bubble. We conclude that heightened incentives and consequent earnings inflation contributed to the bubble.

JEL Classification: G32, J33, K22, M41

Keywords: equity incentives, insider trading, financial reporting, smoothing

this draft: October, 2008

Download the paper from SSRN.

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Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 865-3271
(814) 863-8393 fax
huddart@psu.edu
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