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Unenforced or Flawed? The Case of China's Regulation on Insider Trading of Unlocked Restricted Stocks

Professor Chu Zhang, Hong Kong University of Science and Technology

14th Aug 2013  11:30 am - 12:30 pm Room 214/215 Economics and Business Building


We examine the effectiveness of a regulation in China that requires insiders who want to sell a large amount of unlocked restricted stocks to do so through the block trading system, which only institutions and wealthy individuals can use, in a bid to deter insiders' informed trading and to protect the average investors. We show that the regulation has failed to a large extent to achieve its goal. We hypothesize that the failure is not due to enforcement issues, which are well documented for other emerging markets. Instead, the regulation contains a loophole which provides a disincentive for the counterparties of insiders' block trades to safeguard the interests of the average investors. As a result, the insiders are able to evade the regulation. Evidence shows that, consistent with our hypotheses, the retail market returns after insider sales are much worse for the block trades than for the retail trades, insider block sales signal poorer future earnings of their firms, and the counterparties of the insider block sales gain from their trades with the insiders.

Complete seminar program is available at:

Room 214/215
Economics and Business Building (H69)
The University of Sydney Business School

Wednesday 14 August 2013
11.30am - 12.30pm

Elvis Jarnecic
T +61 2 9351 8708