Capital market opening and insider trading profitability: Empirical evidence in the context of ‘Mainland China–Hong Kong Stock Connect’

Abstract

This study uses a multi-period DID (difference-in-difference) model and data from Chinese A-share listed companies from 2009 to 2019 to analyse the relationship between capital market opening and insider trading profitability. We find that capital market opening can significantly inhibit insider trading profitability. This relationship remains substantially unchanged after a series of robustness tests. Enhancing stock pricing efficiency and corporate governance are two plausible mechanisms through which capital market opening reduces insider trading profitability. A cross-sectional analysis finds that the mitigating role of the capital market opening is more pronounced in bull stock markets, and in firms with higher price sensitivity and investor attention. Overall, these results enrich the literature on capital market opening and provide new insights into its effects on emerging markets.