XXV Edition

1-2 December 2016"

Insider Sales and Future Stock Price Crash Risk: Firm-Level Analysis

He Guanming, University of Warwick
Ren Helen, University of Warwick
Taffler Richard , University of Warwick

This study investigates whether insiders trade on future stock price crash risk. Using the crash risk measure of Hutton et al. (2009), we find that insider sales are positively associated with future stock price crash risk. This evidence is consistent with the view that insiders are able to assess and anticipate future crash risk and to exploit this information advantage to fulfil personal trading incentives. We also find that the positive association between insider sales and future crash risk is stronger for firms that have high information opacity but weaker for firms that are in financial constraints or in the post SOX period. Additional analysis reveals that insider sales can predict future crash risk as far as 39 months ahead. Our findings have important practical implications. Market participants can use insider sales in ex ante assessing future stock price crash risk, and in appraising the likelihood and extent of insiders’ bad news hoarding which results in the crash risk. Our study should be of particular interest to (i) investors that make portfolio investment decisions, (ii) suppliers and creditors who are concerned about their clients’ creditworthiness, (iii) boards of directors contemplating the design of optimal equity incentive compensation schemes for insiders, and (iv) policymakers regulating insider trading and corporate disclosure transparency.

Area: Corporate Governance (Nedcommunity Award)

Keywords: insider sales; stock price crash risk; financial constraints; information asymmetry; SOX

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