The information content of sudden insider silence

• Main Authors: HONG, Claire Yurong, LI, Frank Weikai
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Insider Silence; Information Content; Underreaction; Return Predictability; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5320; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6319/viewcontent/information_content_of_sudden_insider_silence_accepted.pdf
• Institution: Singapore Management University

We present evidence of investors underreacting to the absence of events in financialmarkets. Routine-based insiders strategically choose to be silent when they possessprivate information not yet reflected in stock prices. Consistent with our hypothesis,insider silence following routine sell (buy) predict positive (negative) future return aswell as fundamentals. The return predictability of insider silence is stronger amongfirms with poor information environment and facing higher arbitrage costs, and alarge fraction of abnormal returns concentrates on future earnings announcements. Along-short strategy that exploits insiders’ strategic silence behavior generates abnormalreturns of 6% to 10% annually