We conducted a comprehensive, up-to-date observation of the enforcement of insider trading law in China. Our observation has a twofold goal. First, we examine how a key component of modern securities law—insider trading law—is enforced in a rapidly growing economy where both regulators and market participants are relatively lacking in experience and must learn to communicate with one another and establish an effective model of law enforcement. Second, we use this observation as a lens for understanding how corporate information flows in a concentrated ownership environment. In theory, controlling shareholders can either voluntarily push for corporate information flow to the general public to win investor confidence, or they can trade for their own private benefit with an informational advantage and keep that information private as long as possible and bet that law enforcement does not detect it. Alternatively, company controllers may opt for a third option, which is to tacitly allow corporate managers to trade with undisclosed corporate information as a form of managerial compensation without conducting any insider trading themselves. Which scenario is more likely is unclear, but China’s concentrated ownership environment makes it a good setting for testing these possibilities.
We first discuss Chinese law against insider trading and then provide both quantitative and descriptive accounts of the law’s enforcement. Quantitatively, we run an event study with a measure called pre-announcement degree of run-up as a proxy for overall insider trading in China. We then compare this result with a comparison group and data from other countries.
We initially found a 65.8% pre-announcement stock price run-up in tried cases of insider trading in China, which is comparable to results in other countries with a dispersed corporate ownership structure. If insider trading in China occurs at a rate similar to that of other countries, then ownership structure would seem to play no significant role in it. However, after running our test again with a comparison group—a sample composed of 330 random major merger and acquisition events in China from 2007 to 2017—we discovered, contradictorily, that the degree of information leakage in the comparison group increased up to 83.9%. These disparate results highlight China’s puzzling enforcement of insider trading law.