WORKING CAPITAL ABNORMALITIES AND INSIDER TRADING PROFITS: ACCOUNTING-BASED ANOMALY DETECTION

Abstract

This study examines the association of working capital anomalies with insider trading returns by developing an accounting-based anomaly detection system. The issue of detecting insiders trading is a perennial challenge in financial markets, especially those associated with emerging economies, where the level of information asymmetry is particularly strong. We posit that abnormal working capital patterns—i.e., unusual accruals, rapid changes in receivables or outsized shifts in current assets—can be indicative of opportunistic behavior associated with insider trading. Adopting a quantitative research design, we studied financial statement data of non-financial firms listed on the Pakistan Stock Exchange (2010–2022) in conjunction with transaction-level insider trading reports. The abnormal working capital was calculated based on expected accrual-based models, and the insider trading profits were computed using event-study technique. A battery of specification and statistical tests, including panel regressions and anomaly detection metrics confirmed a strong positive relationship –firms with larger WCAP anomalies showed stronger profitable insider trades evidence. The findings of this paper add evidence to a developing literature on forensic accounting and integrity in capital markets, showing that accounting-based measures can be used as preemptive signals to identify offenders engaging in fraudulent trading. This study has implications for regulators, auditors and policy-makers in their attempts to reduce insider manipulation.

Keywords: working capital anomalies, insider trading, anomaly detection, accruals, financial reporting, Pakistan Stock Exchange