The Difference Between Conditional and Unconditional Insider Silence Effect: Evidence from China

Abstract

Abstract When the litigation risk is higher, future stock returns are significantly lower following unconditional insider silence (no trade behavior during the last year) than following insider sales [5]. Specifically, Hong and Li [7] define the silence that routine-based insiders strategically choose as conditional insider silence and find that conditional insider silence following routine sell (buy) results in positive (negative) future return. In this paper, we examine whether there are different between the conditional and unconditional insider silence effects in the Chinese stock market. We find that the unconditional insider silence effect is greater than the conditional insider silence effect. Moreover, the firm would have positive abnormal compensation after quarterly earnings announcement under unconditional insider silence. We do not have enough evidence to support that the conditional (unconditional) insider silence effect is larger for companies with good corporate governance than for companies with poor corporate governance. Empirical results show that there are no significant difference between CEO and non-CEO’s conditional and unconditional insider silence effects. JEL classification numbers: G11, G14, G34. Keywords: Insider silence, Earnings announcement, Corporate governance, CEO.