An Empirical Study On Insider Trading In The Chinese Stock Market

Insiders of public companies have preferential access to private information about the given firm. That’s why their trades are among the most widely scrutinized activities in the stock market each day. However, since insiders trade for a variety of reasons, the detection of illegal insider trading becomes very hard for regulators. Besides, the information content of trading activities of corporate insiders is difficult to decipher for general investors.In this paper I provide a new framework for thinking about the detection of trading activities that are likely to be driven by private information from insiders. In doing so, I first identify predictable "regular" insider trading that is not informative about firm’s futures from the past trading history of every insider, leaving a set of information-rich trades by "opportunistic" insiders that contain predictive power for future return, which has been confirmed by empirical study in this paper. A long-short portfolio that follows solely the trades of opportunistic traders earns equal-weighted abnormal returns of276basis points per month in the condition that the information about insider trading is revealed timely.The drivers of the large information differences revealed by opportunistic versus regular trades are also examined. Results show that opportunistic trades embrace significant predictive power for future news announcements from public firms, especially for shorter-term bad news, and that trades of senior insiders have the strongest predictability for future firm return and events. However, no significant evidence can be found to prove the potential link between institutional trading and opportunistic insider trading.The final part of empirical study involves investigating links between the opportunistic classification in this paper and enforcement actions taken by regulators. First, our classification scheme correctly identifies all the insiders who were later charged for illegal insider trading as opportunistic traders. Second, opportunistic traders tend to reduce trading following waves of regulators’insider trading enforcement. Furthermore, our earlier results that opportunistic trades predict future news and returns suggest that some of these insiders may be trading on material nonpublic information.