The economic consequences of tightening insider trading regulation: evidence from Hong Kong

Using a lobbying event that led to the unexpected reversal of a tougher insider-trading blackout regulation in Hong Kong, we examine whether tightening insider-trading regulation increases shareholder value. We find that repealing the regulation increases shareholder value for the entire Hong Kong stock market. The increase is greater for the lobbying firms, which are more affected by the regulation. We find no evidence to support the allegations by proponents of the regulation that insiders at lobbying firms trade more aggressively on future earnings news during the proposed new blackout period or delay earnings announcements. Supporting the argument of the regulation’s critics, we find that lobbying firms’ insiders trade more aggressively during the proposed new blackout period to stabilize their firms’ stock prices amid stock price turmoil. Our results suggest caution in imposing tougher insider trading regulations.