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The Dog That Did Not Bark: Insider Trading and Crashes

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  • JOSE M. MARIN
  • JACQUES P. 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 insiders timing their trades to evade prosecution. Copyright (c) 2008 The American Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2008.01401.x
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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 63 (2008)
Issue (Month): 5 (October)
Pages: 2429-2476

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Handle: RePEc:bla:jfinan:v:63:y:2008:i:5:p:2429-2476

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References

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  1. Franklin Allen & Douglas Gale, 1998. "Bubbles and Crises The Economic Journal," Center for Financial Institutions Working Papers 98-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. David Romer, 1992. "Rational Asset Price Movements Without News," NBER Working Papers 4121, National Bureau of Economic Research, Inc.
  3. H. Henry Cao & Joshua D. Coval & David Hirshleifer, 2002. "Sidelined Investors, Trading-Generated News, and Security Returns," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 615-648, March.
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  5. Harrison Hong & Jose Scheinkman & Wei Xiong, 2005. "Asset Float and Speculative Bubbles," NBER Working Papers 11367, National Bureau of Economic Research, Inc.
  6. Joseph Chen & Harrison Hong & Jeremy C. Stein, 2000. "Forecasting Crashes: Trading Volume, Past Returns and Conditional Skewness in Stock Prices," NBER Working Papers 7687, National Bureau of Economic Research, Inc.
  7. Marin, Jose M & Rahi, Rohit, 2000. "Information Revelation and Market Incompleteness," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 563-79, July.
  8. Gerard Gennotte and Hayne Leland., 1989. "Market Liquidity, Hedging and Crashes," Research Program in Finance Working Papers RPF-184, University of California at Berkeley.
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  11. Lakonishok, Josef & Lee, Inmoo, 2001. "Are Insider Trades Informative?," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 79-111.
  12. Bhattacharya, Utpal & Spiegel, Matthew, 1991. "Insiders, Outsiders, and Market Breakdowns," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 255-82.
  13. Allen F. & Morris S. & Postlewaite A., 1993. "Finite Bubbles with Short Sale Constraints and Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 61(2), pages 206-229, December.
  14. Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 225-38, January.
  15. Conrad, Jennifer & Kaul, Gautam, 1993. " Long-Term Market Overreaction or Biases in Computed Returns?," Journal of Finance, American Finance Association, vol. 48(1), pages 39-63, March.
  16. Devenow, Andrea & Welch, Ivo, 1996. "Rational herding in financial economics," European Economic Review, Elsevier, vol. 40(3-5), pages 603-615, April.
  17. Suleyman Basak & David Cass & Juan Manuel Licari & Anna Pavlova, 2006. "Multiplicity and Sunspots in General Financial Equilibrium with Portfolio Constraints," PIER Working Paper Archive 06-012, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  18. Sylvain Friederich & Alan Gregory & John Matatko & Ian Tonks, 2002. "Short-run Returns around the Trades of Corporate Insiders on the London Stock Exchange," European Financial Management, European Financial Management Association, vol. 8(1), pages 7-30.
  19. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-99, December.
  20. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-78, May.
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Cited by:
  1. Betzer, André & Gider, Jasmin & Metzger, Daniel & Theissen, Erik, 2010. "Strategic trading and trade reporting by corporate insiders," CFR Working Papers 09-15 [rev.], University of Cologne, Centre for Financial Research (CFR).
  2. Dong Lou, 2009. "Attracting investor attention through advertising," LSE Research Online Documents on Economics 29311, London School of Economics and Political Science, LSE Library.
  3. José M. Marín & Antoni Sureda-Gomila, 2007. "Firms vs. insiders as traders of last resort," Working Papers 2007-21, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
  4. Benjamin Golez & José M. Marín, 2010. "Price support in the stock market," Working Papers 2010-16, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
  5. Stefano Giglio & Kelly Shue, 2013. "No News is News: Do Markets Underreact to Nothing?," NBER Working Papers 18914, National Bureau of Economic Research, Inc.

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