Should Regulators Ban Insider Trading? Evidence from Hong Kong

Abstract

Using a corporate lobbying event that led to the unexpected reversal of a tough insider trading blackout regulation in Hong Kong, we examine whether tightening the restrictions of insider trading in family firms-dominated financial markets affects shareholder value. We find that firms more significantly affected by the new regulation were more likely to lobby against the implementation of the new regulation. The stock prices of lobbying firms reacted more positively to the reversal of the regulation than the stock prices of matched non-lobbying firms. We find no evidence that lobbying firms’ insider trades in the proposed new blackout window took advantage of insiders’ private information about forthcoming earnings news. In contrast, our findings suggest that lobbying firms’ insider trades in the proposed new blackout window were motivated to stabilize their firms’ stock prices in times of market uncertainty. Overall, our results suggest caution in imposing one-size-fits-all insider trading blackout regulation.

Keywords: Insider Trading Regulation, Blackout Window, Family Firms, Shareholder Value, Hong Kong

JEL Classification: G14, G18, G38