The Short-swing Rule and Insider Trading in Hong Kong Listed Firms

Project: Research

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A short-swing trade is defined as a purchase and a subsequent sale (or a sale followed by a purchase) within a six-month period. Section 16 (b) of the U.S. Securities Exchange Act of 1934 requires insiders (defined as officers, directors, and owners of more than 10% of a firm's common stock) to return all profits from short-swing trades to the corporation (referred to as the short-swing rule). While the securities laws in many countries have provisions that prohibit insiders from trading on material nonpublic company information, the short-swing rule does not exist in many countries (e.g., U.K., Canada, Germany, Australia, Hong Kong, and Singapore). In addition, the costs and benefits of the short-swing rule have not been carefully studied in prior research and are still hotly debated by regulators in many countries.The effect of the short-swing rule on insider trading is hard to examine in the U.S. because the rule has been in place since 1934 and applies to all the U.S. firms. The researchers contribute to this debate by examining how the absence of the short-swing rule affects the insider trading behavior in Hong Kong listed firms. The following specific questions will be addressed:to document the prevalence, volume, and profitability of short-swing trades;to examine whether short-swing trades (if any) are motivated by insiders' speculation of short-term company news, the researchers examine the timing of short-swing trades relative to a firm's major corporate news announcements;to analyze the factors that determine the cross-sectional and inter-temporal variation in short-swing trades; andto examine how short-swing trades affect investor confidence in financial markets.The research questions will help better understand the costs and benefits of regulating insider trade in the form of a short-swing rule.


Project number9041453
Grant typeGRF
Effective start/end date1/01/1014/03/13