With strict regulations on insiders trading on non-public information, corporate insiders such as officers and directors avoid trading on extreme information, implying a relation between insider silence and future returns. A study conducted by George P Gao and Qingzhong Ma examines the relationship between insider silence and extreme future stock returns, which could be either positive or negative. By looking at extreme scenarios like mergers and bankruptcy that occurred between 1992 and 2010, their research proves that in case of mergers insiders refrain from buying the stocks before the announcement and insiders of a bankruptcy firms avoid selling before the filing. Also, to protect themselves, insiders abstain from trading for a longer time if the information is more extreme. Thus, a longer period of silence is associated with even more extreme returns.
Title: The Sound of Silence: What Do We Know When Insiders Do Not Trade?
Source: Social Science Research Network