Decoding insider silence: evidence from China securities market

This study explores the insider silence—otherwise known as “no trade” behavior. Because of the insiders’ positions, they have the advantage of prior knowledge about the company's undisclosed internal information, which is conducive to insider trading. Gao et al. (SSRN working paper, 2015) argue that, in order to avoid litigation risk, insiders will not sell stocks when they know bad news in advance. In addition, they will not buy. Thus, they choice to remain silent. In this paper, we focus on China market. Owing to the special equity system of China stock market, companies in China stock market are divided into state-owned enterprises or non-state-owned enterprises. We find that the insider silence effect in state-owned enterprises is smaller than that in non-state-owned enterprises. Further, we examine the relationship of insiders with the politics to divide the companies into politically connected enterprises or non-politically connected enterprises. Empirical results show that the insider silence effect in politically connected enterprises is greater than that in non-politically connected enterprises. Due to the growth of the family-controlled firms’ number in China, the companies are divided into family-controlled firms or non-family-controlled firms. We find that the insider silence effect in family-controlled firms is greater than that in non-family-controlled firms. Cohen et al. (J Finance 67:1009–1043, 2012) document that stripping away the uninformative signals of routine traders leaves a set of information-rich opportunistic trades that are powerful predictors of future firm. Thus, we divide the companies into routine insider enterprises and opportunistic insider enterprises according to the types of insider trading. Empirical results show that the insider silence effect is not significantly different between opportunistic insider enterprises and routine insider enterprises.