The Dog that Did Not Bark: Insider Trading and Crashes
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.
|Date of creation:||Apr 2007|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Harrison Hong & Jose Scheinkman & Wei Xiong, 2005.
"Asset Float and Speculative Bubbles,"
NBER Working Papers
11367, National Bureau of Economic Research, Inc.
- Bhattacharya, Utpal & Spiegel, Matthew, 1991.
"Insiders, Outsiders, and Market Breakdowns,"
Review of Financial Studies,
Society for Financial Studies, vol. 4(2), pages 255-82.
- 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.
- Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-99, December.
- Gerard Gennotte and Hayne Leland., 1989.
"Market Liquidity, Hedging and Crashes,"
Research Program in Finance Working Papers
RPF-184, University of California at Berkeley.
- Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-78, May.
- Harrison Hong & Jeremy C. Stein, 2003. "Differences of Opinion, Short-Sales Constraints, and Market Crashes," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 487-525.
- Franklin Allen & Stephen Morris & Hyun Song Shin, 2003.
"Beauty Contests, Bubbles and Iterated Expectations in Asset Markets,"
Cowles Foundation Discussion Papers
1406, Cowles Foundation for Research in Economics, Yale University.
- Franklin Allen & Stephen Morris & Hyun Song Shin, 2003. "Beauty Contests, Bubbles and Iterated Expectations in Asset Markets," NajEcon Working Paper Reviews 391749000000000553, www.najecon.org.
- 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.
- Barlevy, Gadi & Veronesi, Pietro, 2003.
"Rational panics and stock market crashes,"
Journal of Economic Theory,
Elsevier, vol. 110(2), pages 234-263, June.
- Jose Marin & Rohit Rahi, 1996.
"Information Revelation and Market Incompleteness,"
Archive Working Papers
024, Birkbeck, Department of Economics, Mathematics & Statistics.
- 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.
- Devenow, Andrea & Welch, Ivo, 1996. "Rational herding in financial economics," European Economic Review, Elsevier, vol. 40(3-5), pages 603-615, April.
- 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.
- 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.
- Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2001. "Forecasting crashes: trading volume, past returns, and conditional skewness in stock prices," Journal of Financial Economics, Elsevier, vol. 61(3), pages 345-381, September.
- Lakonishok, Josef & Lee, Inmoo, 2001. "Are Insider Trades Informative?," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 79-111.
- 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.
- 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.
- Sanford J Grossman & Joseph E Stiglitz, 1997.
"On the Impossibility of Informationally Efficient Markets,"
Levine's Working Paper Archive
1908, David K. Levine.
- 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.
- 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.
- David Romer, 1992.
"Rational Asset Price Movements Without News,"
NBER Working Papers
4121, National Bureau of Economic Research, Inc.
- Gary Chamberlain, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Oxford University Press, vol. 47(1), pages 225-238.
- 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.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:6244. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.