| This paper first summarizes and analyses the current regulation framework regarding insidertrading in China. Two possible loopholes of specific trading rules are spotted. One is that insidertrades in the non-lock-up period (between the fiscal end date and30days prior to the disclosure ofperiodic financial reports). The other is that relatives of corporate insiders trade in either non-lock-upperiod or lock-up period (between the fiscal end date and disclosure). Then, by using the theories ofinformation asymmetry, the author defines several trading windows and analyses the impact ofchoice of trading window on abnormal return to test whether the two loopholes do exist in reality.The research finds evidence that insiders in general, obtain no significant abnormal return in theshort term but have a significantly positive abnormal return in the medium term when they tradebetween the fiscal end date and disclosure. Grouped tests show that when trading in the abovewindow, insider from Main Board firms have no significant abnormal return in the short term andmedium term, while insider from SME firms have significantly positive abnormal return both in theshort and medium term. The two sub-windows, the non-lock-up period and lock-up period are thenaddressed. We find that insider trading in the non-lock-up period has more significant and robustabnormal returns the trading in the lock-up period, which substantiate the existence of the firstloophole. In addition, grouped tests regarding the short term abnormal return show that relativesobtain significantly higher abnormal return in both the non-lock-up and lock-up period, whichsubstantiate the existence of the second loophole.According to the findings in this study, we suggest that the regulating agencies should draft moreeffective trading rules and apply stricter monitor to insider trading prior to the disclosure of periodicfinancial reports. Insider trading rules regarding the lock-up period posted by firms are also highlyencouraged. |
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