This paper investigates the information content of insider sudden silence. Insiders trade for multiple reasons, and trades driven by liquidity or diversification motives are more likely to be routine based. We hypothesize that if a routine-based insider suddenly stopped trading, in contrast to his/her prior consecutive trading pattern, then this sudden silence of insider trades contains information. Specifically, we find that insiders delay (or cancel) their consecutive sells by 5 (median) months when they possess good information, and delay (or cancel) their consecutive purchases by 4 (median) months when they foresee bad information of the firm. A long-short strategy based on the strategic behavior of insider silence yields a value weighted abnormal return of 0.56% per month....[ Read more ]

This paper investigates the information content of insider sudden silence. Insiders trade for multiple reasons, and trades driven by liquidity or diversification motives are more likely to be routine based. We hypothesize that if a routine-based insider suddenly stopped trading, in contrast to his/her prior consecutive trading pattern, then this sudden silence of insider trades contains information. Specifically, we find that insiders delay (or cancel) their consecutive sells by 5 (median) months when they possess good information, and delay (or cancel) their consecutive purchases by 4 (median) months when they foresee bad information of the firm. A long-short strategy based on the strategic behavior of insider silence yields a value weighted abnormal return of 0.56% per month.