Can Outsiders Often See the Most? Evidence from China: The Impact of Foreign Investors on Insider Trading

Insiders could exploit their informational advantage to obtain excessive returns. Based on the quasi-natural experiment of the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect trading systems, we examine the inhibitory impact of foreign investors on insiders' informational advantage. Our findings indicate that the advent of the Stock Connect trading system has diminished the profitability of insider trading for the target companies. The influence operates through two primary channels: the information effect and the liquidity effect. Specifically, the Stock Connect trading system has hindered insiders' stock buying and their profitability by reducing stock price synchronicity. Besides, it facilitates an increase in insiders' stock selling by addressing liquidity shortages. Further tests demonstrate that those insiders with obvious informational advantage and great power are obviously impacted by the inhibition effect on their profitability. Our results show that the exploration of investment opportunities by foreign investors has reduced the insiders' ability to profit from increasing their shareholdings. Additionally, it offers liquidity support for insiders, enabling them to decrease their shareholdings. These promote fair trading and the efficient functioning of the capital market.