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

George P. Gao, Qingzhong Ma, David T. Ng, Ying Wu

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

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.

Original languageEnglish
Pages (from-to)4835-4857
Number of pages23
JournalManagement Science
Volume68
Issue number7
DOIs
StatePublished - Jul 2022

Keywords

  • insider silence
  • insider trading
  • litigation risk

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