Insider Trading, Disclosure Incentives, and Stock Price Crashes: International Evidence

70 Pages Posted: 24 Nov 2013 Last revised: 3 Mar 2016

See all articles by Jinshuai Hu

Jinshuai Hu

Xiamen University - Institute for Financial and Accounting Studies

Jeong-Bon Kim

City University of Hong Kong

Wenrui Zhang

The Chinese University of Hong Kong (CUHK) - Department of Finance

Date Written: February 2016

Abstract

This study first establishes a causal relation between insider trading and the likelihood of stock price crash occurrence, and then investigates potential channels through which the former influences the latter. Exploiting the initial enforcement of insider trading laws in a country as a natural experiment, we find that insider trading enforcement leads to a significant reduction in stock price crashes. We further show that this effect goes through three channels, i.e., the investor protection channel, the information environment channel, and the corporate governance channel. Our results support the view that insider trading motivates managers to hoard bad news but are not consistent with the information uncertainty argument in Marin and Olivier (2008).

Keywords: Insider Trading; Managerial Disclosure; Stock Price Crash Risk; Bad News Hoarding

JEL Classification: D82, G15, G38

Suggested Citation

Hu, Jinshuai and Kim, Jeong-Bon and Zhang, Wenrui, Insider Trading, Disclosure Incentives, and Stock Price Crashes: International Evidence (February 2016). Available at SSRN: https://ssrn.com/abstract=2359069 or http://dx.doi.org/10.2139/ssrn.2359069

Jinshuai Hu

Xiamen University - Institute for Financial and Accounting Studies ( email )

Xiamen, Fujian 361005
China

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Wenrui Zhang (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong

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