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1、,Equity StrategyIs Insider Trading Really Informative?-Evidence from Chinese Market,March 19,2012,Abstract:We use the insider trading data from January,2005 to February,2012 to implement our research.Our initial evidences show that(1)Insider selling is more frequent than Buying;(2)Managementis more
2、actively at“buy”;(3)Insiders often buy at trough and sellat peak;(4)we find more frequent trading in SME and ChiNextmarket than in main board.For the window before trading announcement,we reportfollowing findings:(1)Chinese Insiders are contrarian investorsas well;(2)Insiders tend to buy the stocks
3、when they areunder-valued and sell when over-valued;(3)Insiders tend to sellthe stocks that show bad growth potential but not necessarily buyeven if the stock shows high growth potential in fundamental.For the post-trade period,we have following findings:(1)“Buy”is far more informative than“Sell”;(2
4、)“Buy”in non-main boardis more informative than in main board;(3)The buy or sell ofmanagement is more informative than that of largeshareholders;(4)The buy of management in SME or ChiNextmarket is the most informative,Corresponding AnalystJianbo Sun,Ph.D.Chief Equity Strategist：sunjianbo：(8610)83571
5、306SAC Certificate No.：S0130511040002Xiaobin QinEquity Strategist,Director：(8610)6656 8746SAC Certificate No.：S0130511030001AcknowledgementWeicheng(Sean)Wang,Ph.D.Equity Strategist,V.P.：（8621）2025 7809Please refer to Information Disclosure section,Equity Strategy,Contents,、Insider Trading in China:L
6、ack of Evidence.1、Insider Trading in China:Preliminary Evidences.2,A.More Frequent Selling than Buying.2,B.Management More Actively at“Buy”?!.3,C.Buy at Trough,Sell at Peak.4,D.More Frequent Trading in SME and ChiNext Market.5,、Pre-trade：Is there any pattern？.6,A.Insiders are Contrarian.6,B.Valuatio
7、n:Buy“Cheap”,Sell“Expensive”.8,C.Fundamental:Sell Those Grow Slower.10,、Post-trade:Informative Indeed!.11,A.Asymmetric Signal:An Overall Conclusion.11,B.Watch Out When Management Buy.13,、Conclusion.14,A.Pre-trade.14,B.Post-trade.14,Figures List.15Tables List.15,Please refer to Information Disclosure
8、 section,2005-01,2005-05,2005-09,2006-01,2006-05,2006-09,2007-01,2007-05,2007-09,2008-01,2008-05,2008-09,2009-01,2009-05,2009-09,2010-01,2010-05,2010-09,2011-01,2011-05,2011-09,2012-01,2005-01,2006-05,2006-09,2007-01,2007-05,2007-09,2008-01,2008-05,2008-09,2009-01,2009-05,2009-09,2011-01,2011-05,201
9、1-09,2012-01,2005-05,2005-09,2006-01,2010-01,2010-05,2010-09,90%,80%,50%,45%,1,Equity Strategy、Insider Trading in China:Lack of Evidence“Insiders”refers to the shareholders of a company or the management that have access tothe first-hand business information.After the equity division reform in 2005,
10、more insiders startto trade in the secondary market which leads to the increasing influence of insiders relative toother investors,institutional or individual.,Figure 1:Increasing Proportion of Free Float Cap.the Proportion 0f Free Float Market Capitalizationthe Proportion of Free Float Capital Stoc
11、k70%60%50%40%30%20%10%Source：iFinD,China Galaxy Securities,Figure 2:Changing Proportion of Mutual Fund Net AssetsNet Assets of the Fund/Total Market Capitalization of A SharesNet Assets of the Fund/Free Float Market Capitalization of A Shares40%35%30%25%20%15%10%5%0%Source：iFinD,China Galaxy Securit
12、ies,As insider trading becomes increasingly important in the market,more investors start topay attention to the signal inherent in their trades.The basic categories of insider trading in thecapital market include:plain buy and sell,Repo,SEO etc.Among them,the buy or sell decisionof insiders receives
13、 most attention of outside investors because such decisions are believed to bebased on insiders valuation of real value of stocks.Just as Individual Investor says,“insiders know their business better than any Wall Streetanalyst.They know when to launch a new product,when the inventory is overloaded,
14、when theprofit margin starts to expand and when the cost will rise”.Overseas financial research has alsofound that insiders are better able to understand the various aspects of the company and theirtrade in the secondary market is often informative.Compared with outside investors,insiders know more
15、details and accurate businessinformation,thus they know more about the companys future development.Hence the tradesbased on such information should be informative and may be regarded as valuable signal.Manyinvestment professionals take this conclusion for granted.However,is insider trading reallyinf
16、ormative in Chinese market?By now there is no rigorous research in this area.We attempt tofill this blank in this research.Please refer to Information Disclosure section,200501,200504,200507,200510,200601,200604,200607,200610,200701,200704,200707,200710,200801,200804,200807,200810,200901,200904,2009
17、07,200910,201001,201004,201007,201010,201101,201104,201107,201110,201201,200501,200504,200507,200510,200601,200604,200607,200610,200701,200704,200707,200710,200801,200804,200807,200810,200901,200904,200907,200910,201001,201004,201007,201010,201101,201104,201107,201110,201201,50,300,250,2,Equity Stra
18、tegy、Insider Trading in China:Preliminary EvidencesBefore verifying the value of insider transaction for outside investors,we first look at thehistorical data since the year of 2005 for preliminary evidences.A.More Frequent Selling than BuyingAccording to the data,there were five big waves of inside
19、r buying and selling respectivelyduring our sample period.The period of“big buy”include 05.8-06.12、08.8-09.1、09.9、10.5 and 11.5-12.1 while the following periods record“big sell”:07.1-08.3、09.3-09.12、10.8-11.1、11.3-11.7 and 11.11.Since January 2005,the monthly average trade amount is0.763 billion RMB
20、(buy)and 4.852 billion RMB(sell)while in the big waves of insider trading,this number increases to 1.477 billion RMB(buy)and 8.851 billion RMB(sell)respectively.Looking at either entire sample period or big waves,we find“buy”is far less frequent than“sell”.The frequency of“sell”events is similarly h
21、igher than that of“buy”.Figure 3:Amount of Insider Trading,the Total Volume of Buys(100M),the Total Volume of Sales(100M),3010-10-30-50-70-90-110-130-150Source：iFinD,China Galaxy SecuritiesFigure 4:Frequency of Insider Tradingthe Total Number of Buys Announcementthe Total Number of Sales Announcemen
22、t200150100500Please refer to Information Disclosure section,All,1,3,Equity StrategySource：iFinD,China Galaxy SecuritiesB.Management More Actively at“Buy”?!We exclude the transactions of Central Huijin and other financial institutions.Instead,ourinsider trading sample mainly consists of the trades in
23、itiated by other large shareholders andmanagement.Thus we have 8750 observations.We summarize the frequency and tradingamount of“buy”and“sell”and report following pattern:（1）Company management are more active at buying than selling(which is a little bitsurprising)；（2）Large shareholders(excluding fin
24、ancial institutions)are more active at selling thanbuying；（3）Insider buying is less frequent in SME and ChiNext market relative to main board.Table 1：Sample Percentages of Insider Buy versus Sell both in terms of Frequency and Amount1Insider Category,Large Shareholder,Management,Buy Freq.Sell Freq.B
25、uy Amount,18626888649.55,1080（58%）6291（91%）635.2,782（42%）597（9%）14.35,Overall(100 Million）,Sell Amount,3334.59,3216.6,117.99,(100 Million),Buy Freq.Sell Freq.,15014737,924（62%）4552（96%）,577（38%）392（4%）,Main Board,Buy Amount,622.05,615.05,7.0,(100 Million）,Sell Amount,2765.91,2750.17,15.74,(100 Milli
26、on),Buy Freq.Sell Freq.Buy Amount,361215127.5,156（43%）1739（81%）20.15,205（57%）412（19%）7.35,SME and ChiNext(100 Million）,Sell Amount,568.68,466.43,102.25,(100 Million)Source：iFinD,China Galaxy SecuritiesWe exclude the transactions of Central Huijin and other financial institutions.Please refer to Info
27、rmation Disclosure section,200501,200505,200509,200601,200605,200609,200701,200705,200709,200801,200805,200809,200901,200905,200909,201001,201005,201009,201101,201105,201109,201201,4,Equity Strategy,Figure 5:Percentages of Insider Buy in Various Markets,Figure 6:Percentages of Insider Sell in Variou
28、s Market,100%90%,Large shareholders,Management,100%90%,8.67%,Large shareholders Management8.28%,19.15%,80%70%60%,42.00%,38.44%,56.79%,80%70%60%,50%40%30%20%,58.00%,61.56%,43.21%,50%40%30%20%,91.33%,96.09%,80.85%,10%0%,10%0%,Overall,Main Board,Non Main Board,Overall,Main Board,Non Main Board,Source：i
29、FinD,China Galaxy Securities,Source：iFinD,China Galaxy Securities,In the Main Board,many insiders are State-owned shareholders,who are oftenpolitical-oriented.Their trades may not be as informative as other insiders.For this reason,wewill implement analysis for main board and non-main board(includin
30、g SME and ChiNext)separately.C.Buy at Trough,Sell at PeakInitial evidence shows that five big buy waves(05.8-06.12、08.8-09.1、09.9、10.5and 05.8-06.12)all happened at the historical or local trough of the market.In particular,thebig buy wave during 05.8-06.12 corresponds to the historical trough when
31、ShanghaiComposite recorded 998.The latest big buy during 11.5-12.1 is also consistent with abovefinding.In contrast,five big waves of sell(07.1-08.3、09.3-09.12、10.8-11.1、11.3-11.7and 11.11)all correspond to the peaks of the market,where 07.1-08.3 period happened atthe historical peak of A-share mark
32、et.It seems insider trading overall is indeed informative inChinese market.Figure 7:Insider Buy versus Shanghai Composite,50403020100,the total volume of Buys(100M,left)The Shanghai Composite Index,7000600050004000300020001000,Please refer to Information Disclosure section,200501,200506,200511,20060
33、9,200702,200707,200712,200805,200810,200903,200908,201001,201006,201104,200511,200511,200604,200609,200702,200707,200712,200805,200810,200903,200908,201001,201006,201011,201104,201109,201202,200501,200506,200501,200506,200604,200609,200702,200707,200712,200805,200903,200908,201001,201006,201011,2011
34、04,201109,201109,200604,201011,201202,200810,5,Equity StrategySource：iFinD,China Galaxy SecuritiesFigure 8:Insider Sell versus Shanghai Composite,250200150100500,the total volume of Sales(100 M,left)The Shanghai Composite Index,7000600050004000300020001000,Source：iFinD,China Galaxy SecuritiesD.More
35、Frequent Trading in SME and ChiNext MarketThe percentages of insider trades happened in SME and ChiNext keep rising these days.This pattern is especially strong with regard to“Sell”.In January 2012,insider buys in SMEand ChiNext market represent 66%of entire sample while the proportion of sell annou
36、ncementsis as high as 78%.Overall,the Main Board is still the main trade market because of its huge size,but the insider trading in SME and ChiNext is becoming more active.,Figure 9:Buy Announcements%in Various Markets100%90%80%70%60%50%40%30%20%10%0%,Figure 10:Sell Announcements%in Various Market10
37、0%90%80%70%60%50%40%30%20%10%0%,Main Board,SMEB,ChiNext,Main Board,SMEB,ChiNext,Source：iFinD,China Galaxy SecuritiesPlease refer to Information Disclosure section,Source：iFinD,China Galaxy Securities,4,6,Equity Strategy、Pre-trade：Is there any pattern？In this part,we will focus on stock price,valuati
38、on level and business fundamental duringthe pre-trade period in order to explore any potential patterns that may be helpful for identifyingpossible trades.A.Insiders are ContrarianOverseas researches show that insiders are contrarian investors.Is this also true in Chinesemarket?We use Event Study me
39、thodology with Chinese data to test above hypothesis.Specifically,we calculate the raw return for the horizons of one week to one year before tradingannouncements.We also do the same calculation for large shareholder and management tradingseparately.1、What Happened Before Insiders Buy?One week befor
40、e the announcement,we observe positive price reaction when either largeshareholders or management announce to buy.However,when we look at longer pre-tradehorizons such as 3 months,6 months and 12 months,we start to observe significant negativereturn for portfolios involving insider buying.Given that
41、 insiders always actually buy before public announcement,it is easy tounderstand the temporary positive return for short window before announcement.For largeshareholders,their buys usually involve larger number of stocks,which may take longer toexecute such trading order and hence explain why the re
42、turn for one month before buyannouncement is still positive.When we compare such pre-buy price pattern in main board versus that in SME andChiNext market,we find much more significant pattern in the latter.Figure 11:Price Pattern before Buy:Overall,20,ALL,Large shareholders,Management,Prior 1 Week,P
43、rior 1 Month,Prior 3 Months Prior 6 Months,Prior 1 Year,-2-4-6-8-10Source：iFinD,China Galaxy SecuritiesPlease refer to Information Disclosure section,5,5,-5,-5,7,Equity Strategy,Figure 12:Price Pattern before Buy:Main Board,Figure 13:Price Pattern before Buy:SME+ChiNext,All,Large shareholders,Manage
44、ment,All,Large shareholders,Management,0,0,Prior 1 Week,Prior 1 Month Prior 3 Months Prior 6 Months,Prior 1 Year,Prior 1 Week,Prior 1 Month Prior 3 Months Prior 6 Months,Prior 1 Year,-10-15-20-25-30-35Source：iFinD,China Galaxy Securities,-10-15-20-25-30-35Source：iFinD,China Galaxy Securities,2、What
45、Happened Before Insiders Sell?Before insiders sell their stocks,the corresponding stocks had usually accumulatedsignificant positive return.For the portfolio consisting of large shareholders sell,we find thatsuch portfolio had increased approximately 60%in price for the window of 12 months pre-trade
46、.When we look at the portfolio consisting of management sell,such pre-trade pattern is weakerbut we still find a return of positive 26.64%and 25.62%for the 12-months and 6-monthswindows before sell.Figure 14:Price Pattern before Sell:Overall,60,All,Large shareholders,Management,50403020100,Prior 1 W
47、eek,Prior 1 Month Prior 3 Months Prior 6 Months,Prior 1 Year,Source：iFinD,China Galaxy SecuritiesWhen we split the entire sample into two sub-groups according to whether or not theinvolved transactions happened in the main board,we observe two quite different patterns.Specifically,we notice much wea
48、ker positive return for the pre-sell period in non-main board.How do we explain such difference?Please refer to Information Disclosure section,8,Equity StrategyOverseas researches show that insider sell may be motivated by multiple incentives inwhich“reap the profit”,of course,is the most logical in
49、centive.But further research show thatthe liquidity needs of insiders may also lead to the decision of sell.This finding will helpexplain above finding.It is more likely that the insiders of non-main board stocks are private institutions orindividuals who may have more needs for liquidity,which may
50、explain a smaller positive returnbefore sell in non-main board.In comparison,main board stocks have,for a higher likelihood,state-owned institutions as their shareholders who may have lower liquidity needs.Therefore,when they decide to sell,a significant positive return has to be there as pre-condit
