Auditor’s Reporting Change and Insider Trading Behavior: Evidence from Critical Audit Matters as an Exogenous Shock

Mandating the public reporting of Critical Audit Matters (CAMs) found during an audit changes when and how negative firm information is disclosed to market participants. These issues must be reported in the firm’s annual 10-K report starting in 2019. Relative to this regulatory change, we find that insiders at firms reporting CAMs purchase 50 million shares in the 60 days following a 10-K, doubling the amount purchased at these firms prior to the CAMs mandate. Consistent with our multivariate results, this implies that insiders change their trading patterns and purchase shares after the CAMs release date. There are also significant negative abnormal returns for purchases whose 90-day window overlaps with the CAMs release. This suggests that the market reacts negatively to CAMs information, and that insiders are utilizing their private knowledge of the forthcoming audit to shift their purchases to the period after CAMs are released to avoid significant negative returns.