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The Dog that Did Not Bark: Insider Trading and Crashes

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  • Marín Vigueras, José Maria
  • Olivier, Jacques

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 patterns of insider trading driven by earnings announcement dates, or insiders timing their trades to evade prosecution.

Suggested Citation

  • Marín Vigueras, José Maria & Olivier, Jacques, 2007. "The Dog that Did Not Bark: Insider Trading and Crashes," CEPR Discussion Papers 6244, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:6244
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    More about this item

    Keywords

    Crashes; Insider trading; Rational expectations equilibrium; Short-sale constraints; Volatility;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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