Corporate Governance, The Quality Of Information Disclosure&Informed Trading

The separation of ownership and management caused by information asymmetric is the source of many problems in the capital market as well as the modern corporation management. To minimize the transaction cost caused by information asymmetry has always been the focus of theory and practice. One of the results of information asymmetry is informed trading, namely some of investors on the capital market have information advantages to transaction. Based on their information advantage, these investors may act selectively in order to acquire excess returns or to avoid unnecessary losses. The aim of corporate governance is to reduce the information asymmetry and to improve enterprise value both inside and outside the company. In this view, the level of corporate governance is likely to affect the transactions in capital market, it’s reasonable to infer that corporate governance and the quality of information disclosure and the informed trading may affect each other. This paper selects the listed corporations in Shenzhen Stock Exchange during2010-2012as a sample, to explore the relationships among corporate governance, which includes the ownership concentration, the feature of the board of directors and the senior management incentives, and the quality of information disclosure and the informed trading. The empirical results show that both the alignment effects and the entrenchment effects affect the company’s information disclosure quality. The relationship between ownership concentration and the quality of information disclosure is uncertain. But both the alignment effects and the entrenchment effects exist at any time. But higher ownership concentration will cause more informed trading. When the sizes of corporations are controlled, the size of board of directors has no significant correlation with the quality of information disclosure, nor with the informed trading. No significant evidence has been found between the independence of board of directors and the informed trading. The empirical study shows that more monetary compensation will reduce the senior management’s opportunistic behaviors. However, the shares held by senior management have no significant relationship with the informed trading. The findings of this paper remind us that, currently the security markets of China are not perfect, informed trading and possible insider trading under this background is becoming more and more common. To improve the level of corporate governance and the quality of information disclosure of corporations has an important influence in reducing the informed trading and possible insider trading.This paper is organized as follows:the full text is divided into five parts. The first part is the introduction, which describes the background, the significance and innovative points of this research. The second part is theoretical analysis and research hypotheses, the synergistic effect, the entrenchment effect and the management incentive theory are bases of a series of hypotheses. The third part is the empirical research design, which will describe the models, the sample selection, the data sources and the process of PIN (Probability of informed-based trading) calculation. The fourth part shows the empirical results and the corresponding analyses. Last but not the least is the relevant conclusions and possible policy recommendations, followed by the defects and further study of this paper.