The Sound of Silence: What Do We Know When Insiders Do Not Trade?
Cornell University - Samuel Curtis Johnson Graduate School of Management
October 25, 2013
Johnson School Research Paper Series No. 3-2013
This paper examines stock returns following insider silence, periods of no insider trading. We hypothesize that, for fear of litigation risk, rational insiders do not sell own-company shares when they withhold bad news; neither would they buy, given unfavorable prospects; thus they keep silent. By contrast, insiders sell shares when they do not anticipate significant bad news. Consistent with this hypothesis, future returns are significantly lower following insider silence than following insider net selling. Further, the silence-sell return difference is wider among firms with worse information environment and firms at higher litigation risk. In sum, insider silence sounds bad news.
Number of Pages in PDF File: 50
Keywords: Insider trading, Insider silence, Information environment, Litigation risk
JEL Classification: G12, G14, G18
Date posted: October 29, 2012 ; Last revised: January 23, 2014
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