Cost Stickiness and Opportunistic Insider Trading

ABSTRACT This study investigates whether cost management decisions are associated with insider trading profits. We hypothesize that prior to stock sales, self‐serving managers reduce costs to inflate earnings and boost stock prices, while before stock purchases, they maintain higher costs to depress earnings and lower stock prices. Such adjustments create asymmetry in cost behaviour, amplifying or dampening cost stickiness: the well‐documented tendency of costs to rise more with sales increases than they fall with sales decreases. Drawing on the classification method of Cohen et al., we separate opportunistic from routine insider trades. We find that cost stickiness decreases prior to opportunistic sales and increases before opportunistic purchases, with these results robust to multiple insider trade definitions and alternative measures of cost stickiness. Further analyses show that strong corporate governance weakens, while financial opacity intensifies the association between cost behaviour and insider trading gains. These effects are especially pronounced for trades executed by CEOs and CFOs. While our empirical approach documents robust correlations rather than definitive causal mechanisms, the results are consistent with the view that managers may utilize real cost adjustments alongside insider trading, extending prior studies focused primarily on accrual‐based adjustments. Collectively, the results highlight important patterns relevant to corporate governance, market participants, and regulators concerned with financial reporting integrity and insider trading practices.