The Economic Consequences of Tightening Insider Trading Regulation: Evidence from Hong Kong

Abstract

Using a lobbying event that led to the unexpected reversal of a tougher insider trading blackout regulation in Hong Kong, we examine whether tightening insider trading regulation increases shareholder value. We find that repealing the regulation increases shareholder value for the entire Hong Kong stock market. The increase is greater for the lobbying firms, which are more affected by the regulation. We find no evidence to support the allegations made by the proponents of the regulation that insiders of lobbying firms trade more aggressively on future earnings news in the proposed new blackout period or delay earnings announcements. Supporting the argument made by the critics of the regulation, we find that lobbying firms’ insiders trade more aggressively in the proposed new blackout period to stabilize their firms’ stock prices in times of stock price turmoil. Our results suggest caution in imposing tougher insider trading regulation.

Keywords: insider trading regulation, blackout window, shareholder value, Hong Kong

JEL Classification: G14, G18, G38