The Dog that Did Not Bark: Insider Trading and Crashes
Posted: 26 Feb 2012
Date Written: October 1, 2008
This paper documents that at the individual stock level, insiders’ sales peak many months before a large drop in the stock price, while insiders’ purchases peak only the month before a large jump.We provide a theoretical explanation for this phenomenon based on trading constraints and asymmetric information. A key feature of our theory is that rational uninformed investors may react more strongly to the absence of insider sales than to their presence (the “dog that did not bark” effect).We test our hypothesis against competing stories, such as insiders timing their trades to evade prosecution.
Keywords: Insider Trading, Rational Expectations Equilibrium, Trading Constraints, Volatility, Crashes, Short-Sales Constraints
JEL Classification: D82, G11, G12, G14, G28
Suggested Citation: Suggested Citation