The Information Content And Incentives Of Insider Trading In China Market

Insider trading is a special type of corporate event that may contain special information about the firm.The Chinese market has banned insiders of listed companies from trading in the shares of the company they held,until the implementation of 2006 revision of the "Company Law".Since then,insider trades have become more frequent with the development of the A-share market,and relevant regulations have improved.In 2016,the number of insider trading events in the Chinese market exceeded 4000.Relevant information was strictly disclosed as required by the China Securities Regulatory Commission and the Exchange,and was closely watched by investors.However,due to the late development,the studies on the insider trading events in the Chinese market is still immature.The existing research mainly focuses on specific directions,such as stock price effect,insider profitability,etc.,and lacks research on the incentives of insider trading,and the sample time period used is short.With the accumulation of data,further research on the insider trading events in the Chinese market will help to fully understand the impact of insider trading events,enrich the existing research system,and have guiding significance for the supervision of insider trading and investor practice.This thesis mainly studies the information content and incentives of the insider trading.For the information content of insider trades,I use the event study method to test the abnormal return around insider trades,and analyze the impacts of insiders' positions and firm characteristics on the information content of insider trades.I also adopt the portfolio construction method to study whether external investors can use the information of insider trading events to obtain excess returns.In terms of the incentives of insider trading,I start by distinguishing the different trading motives of insiders according to theory and practice,and then tested for contrarian trading motives and using special information trading motives with regression analysis.Finally,I make suggestions for both investors and regulators based on the results.The research results show that the information content of insider trades in China market is significant.Insiders tend to buy after the stock has experienced abnormal decline and sell after the stock has experienced abnormal rise,and the abnormal returns of stocks are significantly positive after insider purchases.The information content of insider trades relates to the insiders' positions,firms' market value and the firms' book-to-market ratios.In terms of incentives,insiders have significant contrarian beliefs to trade,i.e.,they have the incentive to purchase undervalued companies and sell overvalued companies based on market's misvaluation.Insiders also have incentives to use special information to make a profit,but this motivation is not as strong as the contrarian beliefs.In addition,insiders have the motive for reducing their holdings due to liquidity or portfolio balancing after obtaining equity through share reform,equity encouragements and dividend distribution.