Capital market liberalization and opportunistic insider sales: Evidence from China

This study examines the causal effect of stock market liberalization on opportunistic insider sales. Using China's "Shanghai/Shenzhen-Hong Kong Stock Connect" pilot programs as quasi-natural experiments, we find that liberalizing China's equity market to foreign investors can help restrain the opportunistic selling behavior of managers by complementing traditional legal enforcement and regulation mechanisms. We further identify-two main plausible mechanisms that support our results: decreased insider trade profitability and reduction of private information accessibility. The effects of liberalization are particularly pronounced for firms with high information asymmetry and weak corporate governance, non-state-owned enterprises (non-SOEs), and those located in regions with a high marketization level. Our findings also show a similar pattern of insider purchases, which mitigates the potential concern of insider update beliefs. Overall, we highlight the market-oriented discipline role played by foreign investors and the beneficial resultant of capital market liberalization; we also provide direct implications to policy makers and other emerging countries who aim to liberalize their capital markets.