The Sound of Silence: What Do We Know When Insiders Do Not Trade?

47 Pages Posted: 29 Oct 2012 Last revised: 22 May 2015

George Gao

T. Rowe Price; Cornell University - Samuel Curtis Johnson Graduate School of Management

Qingzhong Ma

California State University, Chico - Department of Finance and Marketing

David T. Ng

Cornell University

Date Written: May 18, 2015

Abstract

This paper examines the information content of insider silence, periods of no insider trading. We hypothesize that, to avoid litigation risk, rational insiders do not sell own-company shares when they anticipate 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, we find insiders are more likely to stay silent prior to shareholder litigations or large stock price drops. We also show future stock returns are significantly lower following insider silence than following insider net selling, and insider silence predicts more negative returns among firms at higher litigation risk. In sum, insider silence is bad news.

Keywords: Insider trading, Insider silence, Litigation risk

JEL Classification: G12, G14, G18

Suggested Citation

Gao, George and Ma, Qingzhong and Ng, David T., The Sound of Silence: What Do We Know When Insiders Do Not Trade? (May 18, 2015). Johnson School Research Paper Series No. 3-2013. Available at SSRN: https://ssrn.com/abstract=2167998 or http://dx.doi.org/10.2139/ssrn.2167998

George Gao (Contact Author)

T. Rowe Price ( email )

Baltimore, MD 21297-1215
United States

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Sage Hall 314
Ithaca, NY 14853
United States

Qingzhong Ma

California State University, Chico - Department of Finance and Marketing ( email )

325 Tehama Hall
Chico, CA 95929
United States

David T. Ng

Cornell University ( email )

Ithaca, NY 14853
United States

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