This research studies whether the difference in managerial and investors' beliefs about firm value, "market valuation divergence", is related to managerial insider trading, and if so, whether there is evidence of private accounting information to capture these different beliefs. The main idea involves two steps. First, insiders carefully measure and compare the market's reaction to their company's earnings announcement with their own informed assessment. Second, they act and trade as if they observe the divergence in the market's security valuation from their own assessment. Accordingly, this study hypothesizes that such insider trading is associated with managers' perceptions of such market valuation divergence. The traditional view is that insider trading reveals managers' implicit assessment of company prospects. The hypothesis of this study is that such trading decisions also incorporate mangers' private perceptions about the divergence in security pricing from their own opinion.

The particular focus of this study is a set of publicly traded non-financial companies whose reported earnings are in the middle of the earnings distribution spectrum (which includes companies whose earnings meet or just beat their earnings benchmark versus companies whose earnings just miss the benchmark). The sample consists of 4,357 non-financial firm-year observations from 1996 to 2005. The study applies methodological framework of the Mishkin (1983) test to address the hypothesis. It assesses the relations involving market pricing, characteristics of company earnings and managerial insider trading as these variables relate to the fundamental idea of market valuation divergence. In addition, managerial insiders may have control over the timing of their open market trades and unscheduled stock-option grants. This study analyzes insider trading considering both open market transactions and the unscheduled stock-option grants.

The results of this study indicate managerial opportunism. When the market does not fully assess the valuation implication of accounting accruals, managerial insider trading (broadly conceived to include open market transactions and unscheduled stock-option grants) corresponds to buying or selling behavior associated with managers' private accounting information and the direction of market valuation divergence.