1. Introduction
1.1 Insider Trading and Disclosure of Periodic Financial Reports
Insider trading has been one of the most controversial subjects in security regulation. Thoughthis term is defined differently in various countries/security markets, it is generally considered ascorporate insiders buying and/or selling company s shares with their important non-publicinformation . Corporate insiders are normally referred to as corporate CEOs, supervisors, majormanagement team members. However, relatives of those people are also included with a broaderdefinition of insiders. Due to the information asymmetry between corporate insiders and outsideinvestors, corporate insiders have the motivation to take advantage of their non-public information toobtain abnormal return, which leads to laws and regulations toward insider trading.In China, more and more trading of corporate insiders has been observed in recent years. Likemajor regulating bodies in other countries, SEC, SHSE, SZSE and other agencies in China has putforward five main categories1of detailed rules regarding insider trading in China. In each category,rules can be further break down to forbid or restriction of trading.
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1.2 Research Question
Extensive research has been conducted on whether corporate insiders obtain abnormal returns intrading their own company s stocks. Insider trading is a likely important channel for informedinsiders to exploit the lack of corporate information transparency. Prior research suggests that insidertrading activities reflect insiders information superiority to investors3. Most empirical studiesindicate that insiders enjoy abnormal returns both in the short window and in the medium window(Finnerty, 1976; Friederich, 2002), and abnormal returns are more significant with insider buying(Friederich, 2002). A number of researches argue that insider selling do not exhibit abnormal returns,with the reasoning of insiders simply cashing out for liquidity (Chang, 2002; Ravina, 2010). Then, inlater research, the relation between information asymmetry and insider trading is analyzed. Certainresearch finds that insider shows good timing when they trade and they even manipulate disclosure,which could increase the profit of trading (Noe, 1999; Cheng and Lo, 2006). Also, there is evidencethat larger and more significant abnormal return happens when the magnitude is informationasymmetry is larger (Sapienza, 2010). Some research (Chang, 2006) uses firm s level of corporategovernance to inversely proxy the magnitude of information asymmetry.
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2. Literature Review
2.1 Current Legal Framework regarding insider trading in China
In addition, there are certain regulations regarding the trading of executives in ChiNext listedcompanies.The regulation that is directly related to the insider trading investigated in this study is #4,“Guidance issued by SHSE and SZSE”. However, in order to both understand the thorough legalenvironment of insider trading in China and show the contribution of this study, all the specific rulesregarding each type of corporate insiders are listed (Table 1). It is found that various empiricalstudies have been done regarding other types of insider trading rules in the Chinese stock markets butno one has been done on this rule, which serve as one major contribution of this study.The following paragraphs summarize the existence and results of empirical studies regarding thespecific trading rules in the Chinese stock markets.For Regulation #1 MASRLS, there is evidence indicating that insiders profit from maneuver ofstock prices post the Share Trading Reform, especially by using large dividends6. In addition, all thefirms that had the Share-trading reform have undergone through the 36 months lock-up period. Starting from 2011, their shares are fully tradable. Therefore, research regarding this tradingregulation has no contribution.For rules in Regulation #2, Securities Law of China, an empirical research7has been donetoward short swing trade in China of insiders including relatives8. In addition, insider trading afterresignation is not disclosed, which serves as one of the major reasons of managers from Chinextcompanies resign before cashing out9. Therefore, research regarding the short swing trade has littlecontribution while the research regarding the short selling after resignation would be restricted withno data.
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2.2 Literature Review (Western)
2.2.1 Existence of abnormal return
Most empirical evidence shows that corporate insiders obtain abnormal return both in theshort-term and long-term by trading their own companies stocks (Finnerty, 1976; Gregory, 1994;Friedrich, 2002). The abnormal return is more significant with insider buying (Friedrich, 2002).Some research indicates that insider selling do not have abnormal returns (Chang, 2002; Ravina andSapienza, 2010), and is explained by the liquidity needs of insider selling that excludes insiderinformation or signalling effect. Prior research has examined the relation between insider trading and a variety of informationreleases10. The sources of the abnormal returns are from the insider information and the strategicdisclosure of corporate events concerning the change of the company's stock price (Penman, 1982;Allen, 1982). Suppose the insiders know in advance of the content of the disclosure and predict themarket reaction, then it is found that no matter what kind of corporate event disclosure (periodicfinancial reports, M&As, SEO, etc.), the insider trading is more frequent before the bad news, and ithas a larger impact on the market (Korczak and Lasfer, 2009). Disclosure and insider trading hasconnections. On one hand, the disclosure or the news will affect the trading strategies of the insider.On the other hand, the insider trading posts a signalling effect which moves the stock price.
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3. Research Hypothesis ...... 19
3.1 Trading period and Information Asymmetry Hypothesis ........ 19
3.2 Corporate governance and Information Asymmetry Hypothesis ......... 19
3.3 Relatives trading Hypothesis........ 19
4. Research Design ...... 20
4.1 Event study methodology .... 20
4.2 Definition of trading window..... 22
4.3 Data Source and sample selection.... 23
4.4 Regression models......... 24
4.5 Variables ..... 26
5. Results ......... 28
5.1 Descriptive Statistics........ 28
5.2 Regressions ......... 34
5.2.1 CAR (0, 20) and trading window......... 34
5.2.2 BHAR (0,125) and trading window .... 37
5.2.3 Relatives......... 39
5.3 Robustness check....... 41
5. Results
5.1 Descriptive Statistics
Table 4 summarizes the change in shares of insider trading from Jan. 2010 to Dec. 2011 in theShenzhen Stock Exchange. Key findings are listed as follow. The sample size of insider selling (2,830) and average shares traded (518,776) are bothmuch larger than the insider buying sample (743, and 111,714, respectively). This factsuggests that the motivation of insider trading in China is more likely to be liquidity needsas insider cash out for money. For insider short selling, the sample size (2,349) and average shares traded (546,240)trading from firms in the SME Board both outweigh the Main Board selling sample(481, and 384,633, respectively). In addition, judging from the median of insiderselling, it is noticed that there are extreme observations in the main board sellingsample. This fact could suggest that most of senior managers in firms in the SMEBoard are also large shareholders of the company, therefore more likely to haveliquidity needs. For insider buying, both the sample size (403 and 340) and trading volume (119,826and 102,100) of insider trading from the two boards are comparable. Besides, themedians indicate that there are extreme observations.
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Conclusion
Insider trading has been closely watched and regulated in mature stock markets because insiderscould naturally profit from their information advantage and earn abnormal returns by trading theirown stocks. The majority of current literature in China regarding insider trading deals with theexistence of abnormal returns, and very few articles try to test whether insiders obtain moreabnormal returns by taking advantage of the information asymmetry.In this study, four trading windows, namely non-lock-up window, lock-up window,post-disclosure short window, and other window, are identified to analyze the above question. Thefour trading windows are classified by the relation between the trading date and disclosure date ofperiodic financial statements, and characterized by different degree of accounting informationasymmetry about the firm.
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Reference (omitted)
