The Information Content of Sudden Insider Silence∗

This paper explores the information content of insider sudden silence. We hypothesize that insiders strategically choose to be silent when they possess private information not yet reflected in stock prices. Consistent with our hypothesis, insider silence following a routine selling (buying) schedule predicts positive (negative) future abnormal returns as well as earnings surprise. The return predictability of insider silence is stronger among firms with worse information environment and facing higher arbitrage costs, suggesting that investors underweight the information conveyed in insider silence. We also find that insider silence forecasts future firm fundamentals (e.g., ROA, cash flows, analyst forecast revisions) and that sophisticated investors trade in the direction predicted by the information of insider silence. A long-short portfolio that exploits insiders’ strategic silence behavior generates abnormal returns up to 10.4% annually.