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

George P. Gao (), Qingzhong Ma (), David T. Ng () and Ying Wu ()
Additional contact information
George P. Gao: T. Rowe Price, Baltimore, Maryland 21202
Qingzhong Ma: California State University, Chico, California 95929
David T. Ng: Johnson College of Business, Cornell University, Ithaca, New York 14853
Ying Wu: School of Business, Stevens Institute of Technology, Hoboken, New Jersey 07030

Management Science, 2022, vol. 68, issue 7, 4835-4857

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. Future stock returns are significantly lower following insider silence than following insider net selling, especially among firms with higher litigation risk. We examine two quasinatural experiments where new laws result in changes in shareholder litigation risks for insiders. In both cases, with higher shareholder litigation risks, stocks where insiders stay silent earn significantly lower returns than other stocks.

Keywords: insider trading; insider silence; litigation risk (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:7:p:4835-4857

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