As more corporate insiders are compensated with their firm’s stock, insider trading becomes more common. However, determining when insiders use private information to guide their trades remains a challenge. Regulators and market participants try to infer whether insiders “know something we don’t” by analyzing their trading decisions and adjusting their own portfolios accordingly. Yet, insider trading can also be legitimate – often insiders sell shares simply to meet liquidity needs or diversify their holdings.

The Securities and Exchange Commission (SEC) recognizes this and has implemented safeguards against misuse of private information while protecting insiders from allegations of wrongdoing. One increasingly popular mechanism is scheduling future trades: Insiders publicly file their intention to sell shares at a future date, allowing the market to anticipate these sales. This “levels the playing field,” protecting uninformed investors from trading against better-informed insiders.

However, there is a catch: In the interim between proposing a sale and completing it, insiders can choose to retain – at virtually no cost – the shares they initially planned to sell. In a new paper, I explore whether these retentions predict positive firm performance.

To illustrate, imagine you’re an insider compensated with company stock – your main source of income. Eventually, you plan to sell some shares to cover personal expenses. To avoid any suspicion, you publicly file your intent to sell shares three months from now. Yet, before that date arrives, you learn your company performed exceptionally well in the fiscal year, and you anticipate a significant stock price rise when the results become public shortly after your planned sale. Why wouldn’t you choose to retain those shares a little longer to benefit from the increase? And why wouldn’t you do this when foregoing the planned sale carries no penalty?

How can we observe an insider’s intention to sell? Until recently, it was nearly impossible because insiders typically report executed trades only on Form 4. My study leverages a unique feature in the U.S. for sales not registered with the SEC because, for example,  they were not part of an IPO. Trading rules require insiders to file Form 144, a non-binding notice that includes who intends to sell, how many shares, and an approximate sale date. This allows us to see both the insider’s intent (Form 144) and eventual action (Form 4). If insiders do not sell on the stated date, they can still complete the sale within 90 days without filing a new notice.

How common is it for insiders to propose a sale and then retain shares instead? Quite common, actually. Analyzing over 100,000 filings from 2008 to 2019, I show that 36.2 percent of proposed sales were partially or fully retained on the target date. Most sales happen around the proposed date, but 20.1 percent occur later within the 90-day window. Still, 16.2 percent of proposed sales are never completed.

Are these retentions random or meaningful? I find that retentions predict stronger near-term stock returns. Stocks where insiders retain shares outperform those where insider sales are completed by about 0.33 percentage points in the following month (roughly 4 percent annualized). Simply put, not selling after signaling intent is a positive indicator. The more shares retained, the stronger the signal.

Digging deeper, retentions by lower-ranking insiders don’t predict returns. The signal arises mainly from senior insiders, like CEOs and board members, who likely have valuable information. Also, when insiders break from routine selling schedules and retain shares instead, next-month returns jump by 0.50 percentage points (about 6.2 percent annualized). Moreover, “missing” filings – expected Form 144 submissions that don’t appear – also predict better stock performance. So, opting not to file is as informative as choosing not to sell after filing.

Overall, my study shows that the absence of insider actions carries valuable information. To fully understand insider trading signals, it’s essential to consider not only executed trades but also intentions and cancellations.

The issue. Imagine that on the third day of the trading window the insider has already decided not to sell shares in that 90-day window. The market can be certain that an insider retained shares only after observing the absence of the sale at the end of the 90-day window, which would create an 87-day delay between the insider’s decision and outside investors’ certainty of it. This goes against the  SEC’s mission to in make markets efficient: In waiting to learn of the Form 144 outcome, the pending resolution of the proposed sales prevents prices from incorporating retentions sooner, causing a temporary deadweight loss on market participants.

How can this issue be addressed? Naturally, insiders cannot be forced to complete proposed sales because circumstances and personal needs change. Yet, the lack of prompt disclosure of retentions creates uncertainty. Form 4 trades must be reported within two business days, and Form 8-K events within four, but cancellations of sales plans (such as 10b5-1 plans or Form 144 filings) are disclosed slowly or only at quarter-end.

Gabriel Voelcker is an assistant professor at Dartmouth College’s Tuck School of Business. This post is based on his recent article, “Attention To Retention: The Informativeness Of Insiders’ Decision To Retain Shares,” available here.