A Study On The Effect Of Intercourse In Family Business

Prior research documents that insiders take advantage of their private information to make abnormal profits from their trading to make. The profitability is influenced by the level of information advantage and corporate governance. The purpose of this paper is to examine how the structure of family firms influences the pattern and information content of insider trading.Using a sample of21337insider trading reports between2006and2012, we investigate the pattern of insider trading from family firms.We find that, the controllers of family firms can earn more profits from stock sales than other shareholders as well as the controllers of non-family firms since have more private information and stronger control rights. While in the stock purchase, controllers of family firms earn less since sometimes they purchase the stock in aim of control rights rather than profits. We also find that the controllers of family firms can effectively restrict professional managers from taking their private information to make profits. Additionally, we find all the above effects will be magnified by more control rights of family firms’controller.The result of our study suggests that although the structure of family firms may mitigate the opportunism behaviors of managers, it will also increase controllers’ ability and motivation of taking their information advantage. The findings can contribute to the improvement of regulation of insider trading, especially for the family firms on GEM.