Strategic Silence, Insider Selling and Litigation Risk

57 Pages Posted: 12 Jan 2014 Last revised: 10 Dec 2014

Date Written: December 4, 2014


Prior work finds that managers beneficially time their purchases, but not their sales, prior to their forecasts. Shifting attention from when forecasts are given to if a forecast is given, we link insider selling to silence in advance of an earnings disappointment. In particular, our evidence indicates that managers who deliver disappointing news next quarter are less likely to bundle a warning with the current quarter’s earnings announcement as the amount of shares they sell in the two-week trading window immediately following the current quarter’s earnings announcement increases. These findings suggest that managers rely on a subtle form of opportunism — simply remaining quiet, selling shares in this quarter’s heavily trafficked, typically open trading window, and then waiting for the earnings disappointment to reveal itself next quarter — as opposed to engaging in the overtly opportunistic approach of selling shares just prior to supplying a warning about next quarter along with this quarter’s earnings. This raises the question of whether the absence of incriminating trading, as opposed to the presence of a cautionary warning, drives reductions in litigation risk potentially attributed to warnings. Analyzing earnings-disclosure-related lawsuits, we find that the absence of a warning combined with the presence of selling exacerbates the consequences associated with the individual behaviors. Yet, selling prior to a warning typically does not offset all of the warning’s benefit. In so doing, we supply the first robust evidence of a litigation benefit associated with warning — even after considering the role that managers’ trading behavior plays in shaping their disclosure decisions and influencing the firms’ litigation consequences.

Keywords: disclosure, earnings guidance, insider trading, litigation risk, earnings disappointment, negative earnings news

JEL Classification: M41, K22, G14

Suggested Citation

Billings, Mary Brooke and Cedergren, Matthew C., Strategic Silence, Insider Selling and Litigation Risk (December 4, 2014). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: or

Mary Brooke Billings (Contact Author)

New York University ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
(212) 998-0097 (Phone)

Matthew C. Cedergren

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

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