TY - JOUR
T1 - The Sound of Silence
T2 - What Do We Know When Insiders Do Not Trade?
AU - Gao, George P.
AU - Ma, Qingzhong
AU - Ng, David T.
AU - Wu, Ying
N1 - Publisher Copyright:
Copyright: © 2021 INFORMS
PY - 2022/7
Y1 - 2022/7
N2 - 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.
AB - 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.
KW - insider silence
KW - insider trading
KW - litigation risk
UR - http://www.scopus.com/inward/record.url?scp=85134494839&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85134494839&partnerID=8YFLogxK
U2 - 10.1287/mnsc.2021.4113
DO - 10.1287/mnsc.2021.4113
M3 - Article
AN - SCOPUS:85134494839
SN - 0025-1909
VL - 68
SP - 4835
EP - 4857
JO - Management Science
JF - Management Science
IS - 7
ER -