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

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 quasi-natural 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.