Research On Illegal Insider Trading And Corporate Governance Of Chinese Stock Market

Insider trading is one type of the serious irregularities on the stock market. The activity not only violates 'fair, just and open' principle of the securities market, but also seriously affects the market efficiency and resource allocation, hinders the development of capital markets and infringes on the interest of small to mid size investors. China's stock market is a developing market. The market structure and mechanism remained to be perfected. Despite the stringent legislation of insider trading, the cases of insider trading happen all the time. After classification for the cases of insider trading according to information type, insider type, the occurrence of the year, industry and scale, we find that there is a close relationship between insider trading and corporate governance: all the types of inside information are major information on the firm level, insiders are the key figures of corporate governance activities, most insider trading cases happened before 2001 when the legal environment of corporate governance was poor, insider trading activities are concentrated in Small and medium-sized enterprises (SMEs) which have large investment in R & D.Based on the reality relation of insider trading and corporate governance, this paper deeply and systematically studies the relationship between corporate governance and insider trading for the first time, and explores into the relationship between the two from two aspects of the theoretical model and empirical study. Through research, we hope to help companies find the best pattern of corporate governance to prevent insider trading, and assist investors to identify the possibility of insider trading through the corporate governance variables and the performance of the stock market, avoid the losses of those transactions with informed traders.Four parts construct the body of the paper. In the first part, a mathematical model of a large shareholder's decision-making process on corporate governance and insider trading is constructed; this study provides a theoretical foundation for the subsequent empirical research. In the second part, agent variables of insider trading and corporate governance are searched and constructed, which prepares for the empirical research. The third part researches on the relationship between insider trading and corporate governance from the perspective of statistics and empirical study. In the last part, some policy recommendations are proposed based on the results of the first three parts.In order to provide the theoretical basis for the research, this article constructs a mathematical model of a large shareholder's decision-making process on corporate governance and insider trading which is suitable for the Chine's stock market and companies. This model is based on the theory model in Maug (1998), the differences are adding a non-short-selling restriction on the constraints and deeply studying the choices of large shareholder's dominant strategies. Through the research, we find that earnings on insider trading are motives and compensations for the corporate governance of the large shareholder. Increasing of the liquidity will enhance the earnings on inside trading and improve the corporate governance of large shareholder. But at the meantime, it will decrease the lock-in effect and thereby reduce the large shareholder's incentives on corporate governance. Initial equity sharing plays an important role among the relationship of insider trading, corporate governance and liquidity.For the effectiveness of subsequent empirical research, this paper carefully selects and constructs the agent variables of insider trading and corporate governance. At the basis of previous studies, we sum up and refine four agent variables for insider trading: the cumulative abnormal return (CAR), the mean relative turnover (ARTO), asymmetric information (raw C2 and C2), the probability of insider trading (D1). The first three variables measure the extent of insider trading and the last one measures the possibility that insider trading occurs. From the basic concepts of corporate governance theories, under the guidance of the aim and idea of corporate governance, on reference of existing evaluation and research on corporate governance index, based on the comprehensiveness, accuracy, objectivity and availability considerations, this paper constructs a corporate governance index in line with the China's national conditions for the evaluation and measurement of corporate governance in China. The G index includes five mechanisms (equity ownership structure and behaviors of controlling shareholders, board of directors, board of supervisors, managers, stakeholders) for a total of 35 specific indicators.In order to verify the relationship between the two aspects, we first make a preliminary judge of the relationship from the point of view of statistical analysis of the agent variables' data of black sample and white sample. Through the analysis, we verify the agent variables to be effective. Then under the assumption that corporate governance decisions are exogenous, this paper puts forward four hypotheses and the corresponding models according to the theoretical relationship between insider trading and corporate governance and the previous statistical results. The regression results show that insider trading can gain abnormal return with trade volume higher than the market and there is serious information asymmetry, which can serve as the powerful evidence to forbid and prevent insider trading. The better the corporate governance is, the lower the possibility of insider trading is and the smaller the extent of information asymmetry is. Therefore, people should embark on improving the corporate governance as it is crucial to prevent insider trading risk. Finally, under the assumption that corporate governance decisions are endogenous and by adding a key variable of firm value, this article constructs a simultaneous equations system. Endogenous results show that poor corporate governance is still an important reason for the occurrence of insider trading and there is a positive dynamic relationship between corporate governance and firm value. Insider trading activities are bound to accompany and accelerate the upgrading of the firm value.In the end, some proposals from the perspective of corporate governance are given to the regulation and prevention of insider trading.