Do Insiders Trade on Government Subsidies?

51 Pages Posted: 28 Jan 2022

See all articles by Hanwen Sun

Hanwen Sun

University of Bath, School of Management

Kangtao Ye

Renmin University of China - School of Business

Cheng (Colin) Zeng

Hong Kong Polytechnic University

Date Written: January 24, 2022

Abstract

We examine whether and how insiders trade on government subsidies, a major instrument through which the governments intervene in the economy. Using a novel dataset of government subsidies of Chinese listed firms, we find that net insider purchase increases significantly during the month of subsidy receipt. The effect of subsidies on insider trading is weaker in firms with a more transparent information environment and when subsidies are granted in a more predictable manner. In contrast, the effect is more pronounced for politically connected firms. Further analysis shows that the subsidy-trading relation may reflect both insiders’ informational advantage concerning subsidies and their superior ability to detect mispricing-related opportunities. Our findings provide new insights into the capital market consequences of government subsidies through the lens of insider trading.

Keywords: Insider trading; Government subsidy; Information transparency; Political connection

JEL Classification: G14, G18, H25, H71

Suggested Citation

Sun, Hanwen and Ye, Kangtao and Zeng, Cheng, Do Insiders Trade on Government Subsidies? (January 24, 2022). Journal of Accounting and Public Policy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4016641

Hanwen Sun (Contact Author)

University of Bath, School of Management ( email )

School of Management, University of Bath
Bath
Bath, BA2 7AY
United Kingdom

Kangtao Ye

Renmin University of China - School of Business ( email )

Beijing
China

Cheng Zeng

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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