The Sound of Silence: What Do We Know When Insiders Do Not Trade?
T. Rowe Price; Cornell University - Samuel Curtis Johnson Graduate School of Management
California State University, Chico - Department of Finance and Marketing
David T. Ng
May 18, 2015
Johnson School Research Paper Series No. 3-2013
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.
Number of Pages in PDF File: 47
Keywords: Insider trading, Insider silence, Litigation risk
JEL Classification: G12, G14, G18
Date posted: October 29, 2012 ; Last revised: May 22, 2015