When Does Insider Sales Predict a Crash?

Abstract

This study documents that predictability of insider trading on future stock price crash varies according to the types of insiders and the timing of the sale. Using insider trading data from Korea between 2005 and 2014, we find that largest shareholders tend to sell far before a stock price crash, while other types of insiders, including other large shareholders and executives, are more likely to sell immediately prior to a crash. Such pattern is more pronounced in firms with low CSR scores and low R-squares, but not observed among firms with high CSR scores or high R-squares. We also find that our results are stronger amongst firms with higher litigation risk. These findings suggest that largest shareholders may be well aware of the potential legal or reputational risk associated with insider trading while the remaining insiders may be less concerned.