An Empirical Research On Relationship Between Internal Control Quality And Insider Trading

Due to the wide existence of insider trading in China’s security market in recent years and the severity of damage that insider trading brings, the regulators pay high attention to insider trading, and are eager to find an effective way to inhibit insider trading. With the increasingly highlighted role of internal control in corporate governance, the research on its relationship with insider trading becomes more meaningful. This paper focuses on the generalized insider trading to find out whether there are insider tradings when the insiders of listed companies dealing their shares. Insiders are classified into two types, directors, supervisors and management as the first type insiders, big shareholders as the second type insiders. The research on the first type insiders are subjected on Shanghai Stock Market A-shared listed companies, but the second type insiders are subjected on Shenzhen Stock Market A-shared listed companies, and the research period is from year2008to year2012. This paper adopts theoretical and empirical method to test the existence of insider trading and whether internal control can have certain effect on the two type insiders’insider trading. Firstly, this paper uses the cumulative relative turnover ratio(CRTO) as the proxy variable for insider trading, and the result shows that CRTO is significantly different from zero, which means that insider trading does existence in two type insiders. Then this paper uses a multiple regression model to test the relationship between internal control and insider trading. The result shows that internal control has a positive effect on inhibiting the first type insiders’ insider trading, but has no obvious effect on that of the second type insiders. Finally, this paper puts forward some advices on how to inhibit insider trading from perspectives of internal control system construction and regulation.