The Information Content of Sudden Insider Silence
68 Pages Posted: 10 Dec 2015 Last revised: 16 Feb 2018
Date Written: February 14, 2018
We present evidence of investors underreacting to the absence of events in financial markets. Routine-based insiders strategically choose to be silent when they possess private information not yet reflected in stock prices. Consistent with our hypothesis, insider silence following routine sell (buy) predict positive (negative) future return as well as fundamentals. The return predictability of insider silence is stronger among firms with poor information environment and facing higher arbitrage costs, and a large fraction of abnormal returns concentrates on future earnings announcements. A long-short strategy that exploits insiders' strategic silence behavior generates abnormal returns of 6% to 10% annually.
Keywords: Insider Silence, Return Predictability, Underreaction, Information Content
JEL Classification: G12, G14
Suggested Citation: Suggested Citation