Sell-by-Plan Mandate and Opportunistic Insider Selling: Evidence from China

Abstract

We examine whether requiring insiders to sell their stock shares based on pre-disclosed plans can mitigate opportunistic insider selling activities and, more importantly, to what extent insiders can circumvent this regulation. Using China's mandate enacted in 2017 as the setting, we demonstrate that a sell-by-plan mandate can reduce opportunistic selling activities. However, insiders can circumvent this mandate by strategically initiating their plans before bad news. We find that this gaming practice is widespread in China. It is concentrated in firms with weak governance but largely absent in firms with strong governance. We also find that China's stock market cannot discern whether a plan is opportunistically motivated upon its announcement. Overall, this paper highlights a new form of opportunism in insider trading-opportunistic planning-and proposes a method to identify such plans. Our results also suggest that government regulation, without strong governance, could be ineffective in curbing corporate executives' opportunistic behaviors.

Keywords: Insider Trading, Pre-Disclosure, Plan-Based Regulation, Rule 10b5-1