Political Network and Muted Insider Trading

Abstract

This paper explores the impact of political network on insider trading activities in China. With a comprehensive network mapping links between politicians and firm Chairmen, we find that stronger political network discourages insider trading. Such effect is stronger among long-standing, high-level, and regulatory connections, and persists in the events of M&A and public policy announcement when insiders may make profitable informed trading. This suggests an insinuated rule that managers with powerful political network choose to keep a low profile in insider trading. In exploring the underlying mechanisms, we confirm that the muted insider trading is related to preferable financial and policy support, and are more pronounced in provinces with stronger market force and legal enforcement.

Keywords: Political Network, Insider Trading, State Ownership, Enforcement

JEL Classification: G14, G38, D72, L14