Insider Trading and Corporate Governance Structure : Evidence from Southeast Asia

By examining the flow of the value-relevant information in annual earnings into stock price, we provide evidence that is consistent with the proposition that insiders of Southeast Asian companies controlled by the richest families are particularly aggressive in trading on their proprietary knowledge concerning this information. We find further support for this insider trading proposition based on tests that assume the presence of a strong incentive for insider trading (i) when there is a large change in earnings and (ii) before the first legal case in a country is brought against insider trading. We do not find similar evidence in the relatively well regulated market of Hong Kong or for family-controlled companies overall. Our test results are robust to controls for company-specific size, growth, and risk, as well as to alternative measures of the flow of information into stock price. These findings expand our understanding of how corporate governance structure affects the flow of information into stock price. In addition, these findings are consistent with the notion that insider trading leads to the incorporation of private information into stock price and improves the accuracy of stock price, which suggests that a company's stock price is more informative for companies in which insiders have relatively more opportunities and incentives to trade on their private information