Stock price crash risk and insider trading : evidence from China

Abstract

This paper examines the impact of prior crash risk on insider trading behaviour using a sample of Chinese A-share firms for the 2010-2015 period. Prior crash risk is publicly available information yet represents a source of informational advantage for insiders due to their unique capacity to assess its impact on stock price. Consistent with this assertion, we find a positive correlation between prior crash risk and insider sales value scaled by firm value. This result is robust to market sentiment and contrarian strategy. The result still holds after accounting for possible endogeneity issues using a two-stage least squares estimation. Additionally, we find the relationship is attenuated in state-owned enterprises (SOEs), where corporate governance affects insider motivation and creates administrative restrictions. Our study contributes to the growing literature on crash risk consequences by examining its association with insider trading behaviour. Our results are economically meaningful and feature important implications for investors, boards of directors, and policymakers.