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The Dog That Did Not Bark: Insider Trading and Crashes
Author(s) -
MARIN JOSE M.,
OLIVIER JACQUES P.
Publication year - 2008
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2008.01401.x
Subject(s) - insider trading , insider , stock (firearms) , phenomenon , stock price , jump , business , stock trading , monetary economics , inside information , financial economics , economics , finance , stock market , law , engineering , history , biology , political science , paleontology , context (archaeology) , physics , archaeology , quantum mechanics , series (stratigraphy) , mechanical engineering
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 insiders timing their trades to evade prosecution.