From Cornell University:
Abstract
We examine the phenomenon of insider silence, periods when corporate insiders do not trade. Our evidence strongly supports the jeopardy hypothesis that regulations and fear of legal action inhibit insiders from trading on extreme information, implying a relation between insider silence and extreme future returns. First, insiders of merger targets refrain from buying in the months before the public announcement. Second, among firms that are likely to have bad news, insider silence predicts significant negative future returns, which are even lower than when insiders net sell. Further, the negative information in insider silence is gradually incorporated into stock prices, and a significant portion of it is released around quarterly earnings announcements.
Finally, the price inefficiency associated with insider silence is pervasive, and market frictions make it worse.
Draft October 15, 2012 (50 page PDF)
