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The Difference Between Conditional and Unconditional Insider Silence Effect: Evidence from China

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  • Han-Ching Huang
  • Shan-He Huang

Abstract

When the litigation risk is higher, future stock returns are significantly lower following unconditional insider silence (no trade behavior during the last year) than following insider sales [5]. Specifically, Hong and Li [7] define the silence that routine-based insiders strategically choose as conditional insider silence and find that conditional insider silence following routine sell (buy) results in positive (negative) future return. In this paper, we examine whether there are different between the conditional and unconditional insider silence effects in the Chinese stock market. We find that the unconditional insider silence effect is greater than the conditional insider silence effect. Moreover, the firm would have positive abnormal compensation after quarterly earnings announcement under unconditional insider silence. We do not have enough evidence to support that the conditional (unconditional) insider silence effect is larger for companies with good corporate governance than for companies with poor corporate governance. Empirical results show that there are no significant difference between CEO and non-CEO’s conditional and unconditional insider silence effects.  JEL classification numbers: G11, G14, G34.

Suggested Citation

  • Han-Ching Huang & Shan-He Huang, 2022. "The Difference Between Conditional and Unconditional Insider Silence Effect: Evidence from China," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 12(3), pages 1-5.
    • Handle: RePEc:spt:admaec:v:12:y:2022:i:3:f:12_3_5
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    References listed on IDEAS

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    1. Hong, Claire Yurong & Li, Frank Weikai, 2019. "The Information Content of Sudden Insider Silence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(4), pages 1499-1538, August.
    2. Allan Hodgson & Michael Seamer & Katherine Uylangco, 2020. "Does stronger corporate governance constrain insider trading? Asymmetric evidence from Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 2665-2687, September.
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    4. Leslie A. Jeng & Andrew Metrick & Richard Zeckhauser, 2003. "Estimating the Returns to Insider Trading: A Performance-Evaluation Perspective," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 453-471, May.
    5. Han-Ching Huang & Ren-Cyuan Chan, 2021. "Decoding insider silence: evidence from China securities market," Journal of Asset Management, Palgrave Macmillan, vol. 22(7), pages 581-599, December.
    6. Alan D. Jagolinzer & David F. Larcker & Daniel J. Taylor, 2011. "Corporate Governance and the Information Content of Insider Trades," Journal of Accounting Research, Wiley Blackwell, vol. 49(5), pages 1249-1274, December.
    7. Seyhun, H. Nejat, 1986. "Insiders' profits, costs of trading, and market efficiency," Journal of Financial Economics, Elsevier, vol. 16(2), pages 189-212, June.
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    9. Dai, Lili & Fu, Renhui & Kang, Jun-Koo & Lee, Inmoo, 2016. "Corporate governance and the profitability of insider trading," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 235-253.
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    More about this item

    Keywords

    Insider silence; Earnings announcement; Corporate governance; CEO.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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