The Dog that Did Not Bark: Insider Trading and Crashes
57 Pages Posted: 20 Mar 2006
Date Written: March 19, 2007
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. We test our hypothesis against competing stories such as patterns of insider trading driven by earnings announcement dates, or insiders timing their trades to evade prosecution. Finally we provide new evidence regarding crashes and the degree of information asymmetry.
Keywords: Insider Trading, Rational Expectations Equilibrium, Trading Constraints, Volatility, Crashes, Short-Sales Constraints
JEL Classification: D82, G11, G12, G14, G28
Suggested Citation: Suggested Citation