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

Author

Listed:
  • 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)

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.

Suggested Citation

  • George P. Gao & Qingzhong Ma & David T. Ng & Ying Wu, 2022. "The Sound of Silence: What Do We Know When Insiders Do Not Trade?," Management Science, INFORMS, vol. 68(7), pages 4835-4857, July.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:7:p:4835-4857
    DOI: 10.1287/mnsc.2021.4113
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