Insider Trading Regulation of Unlocked Restricted Stocks in China

We examine a regulation in China that requires corporate insiders who wish to sell large amounts of unlocked restricted stocks to do so through the block trading system. The design of the regulation is suboptimal as it does not restrict counterparties of the insiders' block sales from reselling the stocks. The evidence shows that retail market returns are lower after insider block sales than after insider retail sales, insider block sales signal poorer future earnings, and counterparties of insider block sales can gain from buying shares at a discount and quickly selling them to average investors in the retail market. The study attests the importance of the completeness and consistence of law and regulations.