Does Insider Trading Regulation Benefit Shareholders: Evidence from Hong Kong

Project: Research

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The HKSE bans insiders from trading in their own firms’ shares in a period immediately before the announcement of financial results. Prior to 1/1/2009, the blackout period is 2 months in a year. In early 2008, the HKSE proposed to extend the insider trading blackout window from two months to a maximum of 7 months. The proposed rule was subsequently approved by the Securities and Futures Commission in December 2008 and was scheduled to take effect on 1/1/2009. However, in approximately two weeks prior to the effective date, 236 Hong Kong listed firms (denoted lobbying firms) objected to the new rule and successfully pressured the HKSE to modify the new rule by significantly reducing the length of the blackout period to 3 months in a year.This proposal utilizes this unique experiment to examine how changing insider trading regulation affects shareholder value. We conduct several types of complementary analyses. Our first analysis assesses the overall effect of changing the insider trading blackout window on shareholder value by conducting an event study of the stock market reactions to the initial new rule proposal and the subsequent reversal of the new rule. We will conduct the event study for all firms as a whole as well as for the 236 lobbying firms and non-lobbying firms separately.Our second analysis examines the economic determinants of a firm’s decision to lobbying against the new insider trading rule. We are interested whether lobbying is motivated by efficiency reasons (i.e., shareholder value increasing) or managerial agency problems (i.e., shareholder value decreasing).Using the years prior to the new rule, our third analysis examines whether the lobbying firms are more likely to delay the announcement of financial results than the non-lobbying firms in order to increase their insider trading profits during the period that would be otherwise banned by the new rule.Our last analysis examines the insider trading behavior of the lobbying firms in the years prior to the new rule proposal. We examine whether lobbying firms’ net insider trading volume (purchases minus sales) in the period that would be affected by the new rule is positively associated with the subsequently announced earnings surprises. In addition, we also examine whether the lobbying firms’ insiders earn a greater abnormal return from their trades in the period that would be affected by the new rule relative to their trades in the period not affected by the new rule.


Project number9041584
Grant typeGRF
Effective start/end date1/01/112/10/13