Working Paper: CEPR ID: DP6244
Authors: Jos Maria Marin Vigueras; Jacques Olivier
Abstract: This paper documents that at the individual stock level insiders sales peak many months before a large drop in the stock price, while insiders purchases peak only the month before a large jump. We provide a theoretical explanation for this phenomenon based on trading constraints and asymmetric information. A key feature of our theory is that rational uninformed investors may react more strongly to the absence of insider sales than to their presence (the 'dog that did not bark' effect). We test our hypothesis against competing stories such as patterns of insider trading driven by earnings announcement dates, or insiders timing their trades to evade prosecution.
Keywords: crashes; insider trading; rational expectations; equilibrium; short sale constraints; volatility
JEL Codes: D82; G11; G12; G14; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Insider sales (G14) | Stock price drop (G19) |
| Insider purchases (G34) | Stock price jump (G19) |
| Absence of insider sales (G14) | Likelihood of crash (C29) |
| Recent insider sales (G34) | Likelihood of crash (C29) |
| Past insider sales (G14) | Likelihood of crash (C29) |