Insider Trading, Information, Profit Motive, And Checks And Balances Factors

Insider trading is a new phenomenon from 2006, the year in which the new "Company Law" and "Securities Law" are implemented. Generally, not all insider trading is illegal, but because of their superior status on firm's information, the corporate insiders can easily earn abnormal returns through the transactions based on such information. Therefor the insider trading is a controversial issue in the market and has raised the regulatory agency's high degree of attention. However, in order to regulate the insider trading effectively, we have to answer the three questions below: what is the situation of the insider trading? Whether the insider transactions are based on the inside information? And which mechanisms can reduce the insider's illegal transactions.In this paper, we have three terms. The insider trading refers to the stock transactions of officers, directors and supervisors of the firm. The information-based motivation is the insiders' incentives to earn abnormal stock returns from the insider information. The market restrictions mean the mechanisms that the market implementing to regulate and reduce the illegal insider trading.This paper firstly tells the difference between the legal insider tradings and illegal insider tradings. Then I give a comprehensive introduction on the regulations of the insider trading and a systematical description on the situation of the insider trading. After that, through the analysis of the theory and market environment, I conclude that the insiders will inescapably transact on the insider information in recent Chinese market. My judgement is then confirmed by the empirical evidence based on the relationship between the insiders' transaction scale and the quarterly earnings report. At last this paper discusses the market restrictions that can regulate and reduce the illegal insider tradings. I think the corporate governance and individual pay are two important mechanisms. The empirical evidences support my assumptions that the insider's tradings are less related with the insider information under the higher corporate governance and with the more individual pays.This paper is a frontier research on the insider trading in China. I find that the insiders in Chinese listed companies are mostly transacted on the insider information because of the relax regulation. I also point out the effective mechanisms to reduce the illegal insider tardings besides the laws and regulations. These findings are useful for the shareholders, other investors and regulatory agncies to regulate the insider tradings.