Insider Trading Regulation: How Much is Too Much?
Dr. Zhihong CHEN
Department of Accounting
The Hong Kong University of Science and Technology
Using an unexpected reversal of a tougher new insider trading blackout rule in Hong Kong, we examine whether imposing excessive regulatory constraint on insider trading increases shareholder value. We find that the insiders of firms most affected by the new blackout rule lobbied against the rule. However, the stock market reacted positively to the lobbying that led to the reversal of the tougher blackout rule. We find no evidence that the insiders of lobbying firms were more likely than the insiders of non-lobbying firms to either trade on the forthcoming earnings news in the new blackout window or delay their firms’ earnings announcements. There is evidence that lobbying firms experienced lower short-term stock return volatility than non-lobbying firms, consistent with the hypothesis that less restrictive insider trading regulation helps mitigate short-term stock price volatility. Overall, our results suggest caution in imposing excessive regulation on corporate insider trading.