What is Common Among Return Anomalies? Evidence from Insider Trading Decisions

Conventional wisdom suggests that corporate insiders buy underpriced and sell overpriced stocks. Considering litigation risk, however, insiders keep silent while anticipating future price drops. We find that this phenomenon of insider silence is systematically related to a broad set of anomalies, especially to their short legs, where persistent abnormal returns exist. Specifically, firms within the short legs whose insiders kept silent in the past experience significant negative future abnormal returns, which are even lower than when insiders net sold. On average, insider silence accounts for 64% of the short-leg abnormal returns. The results survive numerous robustness checks. In sum, we identify a significant common feature among return anomalies, which indicates investors underreact to insider silence information.