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The Information Content of Sudden Insider Silence

Published online by Cambridge University Press:  19 September 2018

Claire Yurong HongOpen the ORCID record for Claire Yurong Hong[Opens in a new window] and
Frank Weikai LiOpen the ORCID record for Frank Weikai Li[Opens in a new window]
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Abstract

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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.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 4 , August 2019, pp. 1499 - 1538
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Footnotes

1

We thank Sumit Agarwal, Utpal Bhattacharya, Ling Cen, Lauren Cohen, Pengjie Gao, Jarrad Harford (the editor), Harrison Hong, Da Ke, Christopher Malloy, Abhiroop Mukherjee, Chay Ornthanalai (discussant), Jerry Parwada, Jay Ritter, Alberto Rossi (discussant), Rik Sen, Kelly Shue (the referee), David Solomon, Wei Xiong, Baolian Wang, Junyu Wang, K. C. John Wei, Yuan Xie (discussant), Jialin Yu, and seminar participants at the 2017 Financial Intermediation Research Society Conference, the 2016 China International Conference in Finance, the 2016 Financial Management Association Asia/Pacific Meetings, the 2017 Asian Finance Association and the Macquarie Global Quant Conference, Princeton Ph.D. Finance Workshop, Citadel, Hong Kong University of Science and Technology, City University of Hong Kong and Xiamen University for helpful comments. All errors are the responsibility of the authors.

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