Do corporate insiders trade on future stock price crash risk?

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Abstract
We explore whether firm managers trade on future stock price crash risk. This depends on managers’ ability to assess future crash risk, and on whether the expected payoff is greater than the expected costs associated with potential reputation loss and litigation risk. We find that insider sales are positively associated with future crash risk, which is consistent with managers’ trading on crash risk for personal gain. We also find that managers take advantage of high information opacity to pursue crash-risk-based insider sales more aggressively, but are less able to capitalize on this in the case of financial constraints or post-SOX.
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  • University of Durham

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