The Information Content of Sudden Insider Silence

We present evidence of investors underreacting to the absence of events in financial markets. Routine-based insiders strategically choose to be silent when they possess private information not yet reflected in stock prices. Consistent with our hypothesis, insider silence following a routine sell (bu...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 2019-08, Vol.54 (4), p.1499-1538
Main Authors: Hong, Claire Yurong, Li, Frank Weikai
Format: Article
Language:English
Subjects:
Abnormal returns
Earnings
Information content
Investments
Prices
Quantitative analysis
Securities markets
Stock exchanges
Stock prices
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Summary:We present evidence of investors underreacting to the absence of events in financial markets. Routine-based insiders strategically choose to be silent when they possess private information not yet reflected in stock prices. Consistent with our hypothesis, insider silence following a routine sell (buy) predicts positive (negative) future returns, as well as fundamentals. The return predictability of insider silence is stronger among firms with a poor information environment and facing higher arbitrage costs, and a large fraction of abnormal returns concentrates on future earnings announcements. A long–short strategy that exploits insiders' strategic silence behavior generates abnormal returns of 6% to 10% annually.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109018001059