Decision Logic And Economic Consequences Of Insider Shareholding Reduction In Listed Companies

Since insiders have all acquired the right to buy and sell stocks in the secondary market,the frequency and scale of insider holdings reductions in China have shown an upward trend and have demonstrated a strong profit-making ability.At the same time,there are also phenomena such as precise reduction,liquidation reduction,resignation reduction,excess reduction and bridge reduction in the capital market,and insiders always seem to be able to use diversified ways to obtain higher returns.Considering the impact of insider holding reduction behaviors on the capital market,the SFC has issued a series of laws and regulations to enhance constraints and restrictions on them through continuously refined regulations on holding reductions,yet there are still more insider holding reductions in the capital market that are on the edge of the policy red line.Insiders take advantage of information about the company’s performance,market valuation and future development status as well as management control to reduce their holdings,actively or passively obtaining certain trading returns,which seriously damages the interests of external uninformed investors and also affects the long-term stable and healthy development of the capital market.Therefore,in order to maintain the open,fair and just order of the capital market and strengthen the functioning of the capital market,it is necessary to study in depth the decision-making logic and economic consequences of insider holdings reduction based on the current effective system as well as the current market situation.This paper focuses on insider holdings and conducts a systematic study from two aspects: first,it examines the decision-making logic of insider holdings,which helps to clarify "whether" and "how" insiders make use of inside information to trade in the process of holding reductions,and helps market participants to better understand and judge insider holdings.The second is to examine the economic consequences of insider holdings in terms of capital market fairness and efficiency,which are important issues in capital markets.Specifically,this paper selects insider holding reduction data of all listed companies in Shanghai and Shenzhen A-shares from 2007 to 2021,takes the decision logic of insider holding reduction as the starting point,further analyzes the effect and mechanism of insider holding reduction on capital market fairness and capital market information efficiency,and also considers the effect of relevant regulations in practice,in order to give more comprehensive and realistic policy recommendations on insider holding reduction,The main content of the study and the research results obtained are as follows The main contents of the study and the conclusions obtained are as follows:First,we examine the drivers of insider ownership reduction behavior at three levels:macroeconomic policy,company,and individual perceptions,and specifically distinguish the types of insiders and their reduction sizes,and also examine the effect of the new regulations on insiders’ decision-making logic.The study finds that the size of insider holdings is negatively correlated with the future performance changes of companies and economic policy uncertainty,while positively correlated with the market valuation level and the historical high ratio of stock prices,indicating that insiders will reduce their holdings based on both their information advantage and their ability to make macroeconomic judgments,while also being influenced by cognitive biases.Large-scale insider holdings are driven by future performance changes and cognitive biases,while small-scale holdings are mainly based on market valuation levels and macroeconomic policy uncertainties.Among all insiders,executives are more likely to reduce their holdings based on market valuations,historical highs in share prices and economic policy uncertainties,while major shareholders are more likely to reduce their holdings based on future performance changes and economic policy uncertainties,while other shareholders do not exhibit observable trading patterns in their holdings.After the introduction of the new regulations,the decision-making logic of insider holdings has changed significantly,and the insiders’ motivation to reduce holdings based on cognitive bias and macroeconomic research and judgment ability has been effectively suppressed,but the insiders’ motivation to reduce holdings based on the information advantage of performance forecast and valuation judgment has not been effectively regulated.In addition,the decision logic of insider holdings reduction also shows a large difference among companies with different nature,different listed sectors and different life cycle stages,as well as different market states.Second,we analyze the impact of insider holdings on capital market equity by examining the excess returns of insider holdings,and distinguish between insider type,executive job hierarchy,executive gender,and majority shareholder control to test for heterogeneity,as well as examine the moderating effect of information transparency and the effect of the new regulations on holdings reduction in policy practice,and also consider the relationship between insider holdings reduction behavior and capital market equity over a long time window..The insider’s proceeds from holding reduction imply the appropriation of the interests of uninformed external investors.The study finds that insiders are able to obtain higher excess returns through holding reduction and show stronger profit-making ability,which affects capital market equity to a certain extent.If insiders are executives,chairman or general manager,female executives and effective controllers,they are able to obtain higher trading returns from their shareholding reductions and have a greater degree of impact on capital market equity.However,improving the transparency of company information can inhibit the profitability of insider holdings reductions,and this moderating effect is effective across different types of insiders.After the introduction of the new regulations on holding reduction,opportunistic holding reduction by insiders has not been effectively governed and still exhibits a higher frequency and scale.Further,the impact of insider holdings reduction on capital market fairness diminishes with time.Finally,the relationship between insider shareholding reduction and capital market information efficiency is analyzed by using stock price synchronization to measure capital market information efficiency.While testing the mechanism of action based on the information asymmetry perspective,the effect of noise trading is also considered and the effect of the new regulations on shareholding reduction is further determined.It is found that insider shareholding reduction helps to enhance capital market information efficiency to a certain extent,and this relationship will be weakened as the quality of the company’s internal control,market attention and the level of marketization of the region in which it is located increase.The results of the mechanism test indicate that insider ownership reduction further enhances the information efficiency of the capital market mainly by reducing the degree of information asymmetry.The results of the heterogeneity test based on firm characteristics show that the effect of insider ownership reduction on capital market information efficiency is stronger when the firm is non-state-owned,on the main board of the SSE and has a higher business complexity.The results of the heterogeneity test based on insider type show that the shareholding reduction by major shareholders helps to enhance capital market information efficiency,while the shareholding reduction by executives reduces information efficiency.The positive effect of insider shareholding reduction on capital market information efficiency is not disturbed by noisy trading,and the improvement of information disclosure system after the introduction of new regulations on shareholding reduction further promotes the improvement of capital market information efficiency.This paper systematically identifies the decision-making logic of insider holdings in the context of the increasing frequency and scale of insider holdings,based on the institutional background and the current market situation,and analyzes the effects of insider holdings on the fairness and efficiency of the capital market in depth,based on a research paradigm that combines theoretical analysis and empirical testing to obtain conclusions that are more relevant to the market reality.The findings of the study are helpful for market participants to better understand insider holding reduction behaviors,and also provide theoretical basis and data support for regulators to impose more targeted constraints and controls.On the one hand,regulators should increase the regulation of insider holdings,improve the relevance and flexibility of restrictive regulations,and strengthen the regulation of malicious insider holdings and the penalties for noncompliance.On the other hand,regulators should continue to improve the information disclosure system for shareholding reductions,strengthen the requirements for the comprehensiveness and accuracy of information disclosure on shareholding reduction plans,and increase the mandatory content in insider shareholding reduction predisclosure plans,so as to effectively curb the negative impact of insider shareholding reductions on the fairness of the capital market while better playing the role of information transmission of insider shareholding reductions.In addition,improving the transparency of company information can help reduce the degree of information asymmetry with external investors and mitigate the impact of insider shareholding reduction behaviors on the capital market,so the timeliness and reliability of company information disclosure should be further enhanced.