The Dog That Did Not Bark: Insider Trading and Crashes

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. 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. Finally we provide new evidence regarding crashes and the degree of information asymmetry. Journal of Economic Literature Classification Numbers: D82, G11, G12, G14, G28Keywords: Insider Trading, Rational Expectations Equilibrium, Trading Constraints, Volatility, Crashes. * We are very grateful to Antoni Sureda for outstanding research assistance and to Anthony Tay for helpful pointers early in the project. We also thank Joachim Voth for very insightful comments

Firms vs. Insiders as Traders of Last Resort

“…Indeed, our Figure 1 provides a stronger picture in this direction: not only insiders purchases pick after big negative returns, but also insiders sales after large positive returns. Marín and Olivier (2006) also provide evidence supportive of our hypothesis. In particular, they find that large drops in the price of a particular stock are more likely after a period of low insider trading volume (i.e.…”

“…There is, however, more recent evidence linking insider sales to crashes. Marín and Olivier (2006) show robust evidence of a path of insider's high selling activity in the far past and low selling activity in the near past preceding large price drops. The current state of knowledge, hence, is that the information component in both insider sales and purchases is non negligible 2 .…”

Opportunism as a firm and managerial trait: Predicting insider trading profits and misconduct

“…A large literature studies the ability of insider trades, when aggregated at the level of the firm, to predict stock returns (see, e.g., Lorie and Niederhoffer, 1968;Jaffe, 1974;Seyhun, 1986;Rozeff and Zaman, 1988;Lin and Howe, 1990;Lakonishok and Lee, 2001;Marin and Olivier, 2008; and the review of Seyhun, 1998). These studies show that profitable trading strategies can be constructed based upon publicly available information in insider trades.…”

Strategic Trading and Trade Reporting by Corporate Insiders

“…The data selection process follows that of Lakonishok and Lee (2001) and Marin and Olivier (2008)  The transaction date and the reporting date (SEC receipt date).…”