Management Trading in Chinese Entrepreneurial Firms on the ChiNext

ABSTRACT

We examine management trading in Chinese entrepreneurial firms on the ChiNext. We find that management shareholdings are considerably high, and executives tend to sell their shares after the IPOs on the ChiNext. The propensity for executives to sell shares is negatively correlated with the firms’ corporate governance and current operating cash flows, but the amount they sell is only positively correlated with the level of management holdings. Both the management selling decision and percentage of selling do not associate with firms’ earnings and sales growth. This suggests that managers are profit makers rather than informed traders in their selling activities on the ChiNext. We also find that the market reaction to management selling is substantially negative, which implies a herding effect of investors following executives to sell shares.

KEY WORDS:

• China insider
• ChiNext
• entrepreneurial firms
• management trading

Notes

1. Shen Hu, “ChiNext creates 13 billionaires on paper on first trading day,” Caijing News, October 30, 2009 (available at http://english.caijing.com.cn/2009-11-02/110301171.html).

2. “ChiNext faces bubble risk,” Xinhua News, October 10, 2013 (available at http://news.xinhuanet.com/english/business/2013-10/10/c_132785978.htm).

3. Olivia Chung, “ChiNext strategy—list and run,” Asia Times, November 9, 2010 (available at http://www.atimes.com/atimes/China_Business/LK09Cb02.html).

4. Fang, Jiang, and Qian (2014) show high individual investors’ attention to IPO stocks in the ChiNext, resulting in extremely high first-day returns.

5. The correlations among all independent variables are not high enough to cause multicollinearity. Due to the size limit, the results of Pearson correlations are not reported but are available upon request.

6. We also include industry effect to further check the robustness of our empirical results. The results remain unchanged. Due to the size limit, these results are not reported but can be requested.

7. For example, at the end of 2010, an executive held 10,000 shares of the company he worked at. He sold his shares twice in 2011. The total amount he sold is 6,000 shares. He also purchased 2,000 shares in 2011. Therefore, the SELLPERCENTAGE equals 6,000/(10,000 + 2,000) = 0.5.

Additional information

Funding

Xiao Jun acknowledges the support from the sponsorship of the NNSFC project, “A research on the incentive effects and moral hazard of fund management company ownership” (No. 71363018). Jingjing Yang is grateful for the support from Jiangxi Normal University (Project No. 5279).