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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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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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  1. Gerard Gennotte and Hayne Leland., 1989. "Market Liquidity, Hedging and Crashes," Research Program in Finance Working Papers RPF-192, University of California at Berkeley.
  2. Harrison Hong & Jose Scheinkman & Wei Xiong, 2005. "Asset Float and Speculative Bubbles," Levine's Bibliography 122247000000000861, UCLA Department of Economics.
  3. David Romer, 1992. "Rational Asset Price Movements Without News," NBER Working Papers 4121, National Bureau of Economic Research, Inc.
  4. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-99, December.
  5. 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.
  6. Bhattacharya, U. & Spiegel, M., 1989. "Insiders, Outsiders And Market Breakdowns," Papers fb-_89-20, Columbia - Graduate School of Business.
  7. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  8. Lakonishok, Josef & Lee, Inmoo, 2001. "Are Insider Trades Informative?," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 79-111.
  9. Gadi Barlevy & Pietro Veronesi, 2000. "Rational Panics and Stock Market Crashes," CRSP working papers 483, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  10. 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.
  11. Leslie A. Jeng & Andrew Metrick & Richard Zeckhauser, 2003. "Estimating the Returns to Insider Trading: A Performance-Evaluation Perspective," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 453-471, May.
  12. 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.
  13. Marin, Jose M & Rahi, Rohit, 2000. "Information Revelation and Market Incompleteness," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 563-79, July.
  14. 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.
  15. 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.
  16. Devenow, Andrea & Welch, Ivo, 1996. "Rational herding in financial economics," European Economic Review, Elsevier, vol. 40(3-5), pages 603-615, April.
  17. Stephen Morris & Franklin Allen & Hyun Song Shin, 2004. "Beauty Contests, Bubbles and Iterated Expectations in Asset Markets," Yale School of Management Working Papers ysm346, Yale School of Management.
  18. 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.
  19. Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 225-38, January.
  20. 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.
  21. 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. Dong Lou, 2009. "Attracting investor attention through advertising," LSE Research Online Documents on Economics 29311, London School of Economics and Political Science, LSE Library.
  2. 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.
  3. Partha Gangopadhyay & Ken Yook & Yoon Shin, 2014. "Insider trading and firm-specific return volatility," Review of Quantitative Finance and Accounting, Springer, vol. 43(1), pages 1-19, July.
  4. Betzer, André & Gider, Jasmin & Metzger, Daniel & Theissen, Erik, 2009. "Strategic trading and trade reporting by corporate insiders," CFR Working Papers 09-15, University of Cologne, Centre for Financial Research (CFR).
  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.
  6. Benjamin Golez & José M. Marín, 2010. "Price support in the stock market," Working Papers 2010-16, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.

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