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Uncovering the distress anomaly: The role of insider silence and limited investor attention

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  • Chen, Yongming
  • Li, Hui

Abstract

This study investigates the role of insider silence in explaining the distress anomaly in equity markets. We find that limited investor attention contributes to the overpricing of distressed stocks, leading to predictable returns. Using a novel insider silence measure, we demonstrate that the distress anomaly is concentrated in portfolios where insiders remain silent, with no significant effect observed in net-buy or net-sell portfolios. Our results reveal a significant negative relationship between insider silence and future stock returns, suggesting that non-salient private information, such as insider silence, is systematically overlooked by investors. Furthermore, we provide evidence of a rivalry between salient public information and non-salient insider silence for limited investor attention, particularly in firms with higher public information availability. These findings underscore the importance of cognitive biases in shaping market outcomes and extend the literature on investor behaviour and market anomalies.

Suggested Citation

  • Chen, Yongming & Li, Hui, 2025. "Uncovering the distress anomaly: The role of insider silence and limited investor attention," International Review of Economics & Finance, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:reveco:v:99:y:2025:i:c:s1059056025001546
    DOI: 10.1016/j.iref.2025.103991
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    More about this item

    Keywords

    Limited attention; Distress anomaly; Investor behaviour; Insider trading; Signalling;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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