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Insider Trading in Hong Kong: Tests of Stock Returns and Trading Frequency

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  • Michael Firth

    ()
    (Department of Finance and Insurance, Lingnan University of Hong Kong, Hong Kong)

  • T. Y. Leung

    ()
    (Department of Accountancy, City University of Hong Kong, Kowloon Tong, Hong Kong)

  • Oliver M. Rui

    ()
    (Faculty of Business Administration, The Chinese University of Hong Kong, Shatin, Hong Kong)

Abstract

The main purpose of this paper is to examine the legal insider trading activities by directors of companies listed on the Hong Kong Exchange over the period 1993 to 1999. One characteristic of insider trading in Hong Kong is the high frequency of transactions and the large amounts of money involved. Inside purchases appear to signal and correct undervaluation and inside sales appear to signal and correct overvaluation. In contrast to research from Britain and the United States, insider sales are more informative than purchases. On average, insiders earn HK$91,297 per trade, while outsiders who mimic insiders' transactions earn minimal returns. Many firms suffer from infrequent trading and our results are consistent with directors engaging in inside transactions so as to help create a market for the shares. In additional tests, we find that the frequency of insider trading is a function of information asymmetry.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

Volume (Year): 14 (2011)
Issue (Month): 03 ()
Pages: 505-533

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Handle: RePEc:wsi:rpbfmp:v:14:y:2011:i:03:p:505-533

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Keywords: Insider trading; stock returns; trading frequency;

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