Insider Trading in Hong Kong: Concentrated Ownership Versus the Legal Environment

We examine the profitability of insider trading in Hong Kong between 1993 and 1997. On average, firms in Hong Kong have very concentrated ownership and insiders trade more actively and account for larger fractions of total turnover of their firms' shares than do US insiders. Inside sellers in Hong Kong earn negligible rents; however, inside buyers earn statistically and economically significant positive mean abnormal returns. Inside buyers' abnormal returns are especially large for firms in consolidated industries. We argue that such firms are less transparent than firms that operate in more focused businesses and, consequently, that shares of these firms are more likely to provide opportunities for insiders to trade based on privileged information.