Chinese boards’ structure ‘leads to confusion’

By Tom Mitchell in Hong Kong

Published: April 2 2008 18:43 | Last updated: April 2 2008 18:43

Board structures at Chinese companies can lead to “confusion, ambiguity and potentially ... undermine the board of directors”, according to a study of the corporate governance risks faced by investors in China.

The report by Risk Metrics, which advises more than 2,000 institutional investor clients, said factors including China’s two-tier boards and a well-crafted but untested regulatory regime continue to make the country a risky destination for overseas investors, especially when compared with Hong Kong.

China’s company law requires Chinese companies to establish a “board of supervisors”, usually chaired by an employee representative from the All China Federation of Trade Unions, the country’s only government-sanctioned union.

Other members of the supervisory board typically include an official from the company’s internal Chinese Communist party committee and at least one other person elected by shareholders. Company directors and other senior managers are not allowed to sit on the board of supervisors.

“Recent company law developments ... have clarified and added weight to [the supervisory board’s] role,” Risk Metrics said.

“These changes emphasise its monitoring role and charge it with ensuring the company’s stability.

“Specifically, the board of supervisors is charged with reviewing the company’s finances [and] supervising the board of directors and senior management ... In and of itself, this financial oversight role can create confusion.”

The role and influence of ACFTU branches and party committees at Chinese state-owned companies is even more vague. It is also not uncommon for senior executives suspected of corruption to be detained – without explanation – by the party’s disciplinary inspection committee before reappearing months or years later in a criminal court.

Risk Metrics noted minority shareholders in the two jurisdictions do face some common risks. The state’s firm grip over China’s largest industrial and financial companies is mirrored in Hong Kong by the influence of tycoons and their families

The Chinese government typically holds stakes of 65 per cent or more in large state companies. Hong Kong tycoons exercise similar control through 51 per cent shareholdings.

“There is a cohort of investors who feel comfortable [with] what they don’t know in Hong Kong,” said Dean Paatsch of Risk Metric’s governance division. “It’s very hard to get your arms around what you don’t know in China.”

Copyright The Financial Times Limited 2008

UBS sells stake in Bank of China

By Martin Arnold in London

Published: December 31 2008 13:34 | Last updated: December 31 2008 13:34

UBS has made a profit of about $350m from selling its stake in Bank of China, as Switzerland’s biggest bank continues to repair the damage done to its balance sheet by the credit crisis.

The sale to institutional investors, completed late on Tuesday, will allow UBS to include the gain in its fourth-quarter results when it publishes them on February 10.

The move follows the expiry of a three-year lock-up period that had prevented UBS and other non-Chinese investors, including Royal Bank of Scotland and Singapore’s Temasek, from selling the BoC shares they acquired in 2005.

The deal may relieve fears among some international investors that Beijing would make it difficult for them to offload their lucrative holdings in Chinese banks. Earlier in December Bank of America shelved a $3bn (€2.1bn) sale of China Construction Bank stock following objections from Beijing.

RBS had also been rumoured to be mulling a sale of its BoC stake, which was worth about HK$44.4bn ($5.7bn) at Wednesday’s HK2.12 closing price in Hong Kong.

However, BoC said on Wednesday that none of its other major foreign investors had plans to sell their stakes. Wang Zhaowen, Bank of China spokesman in Beijing, told Reuters that it was informed by UBS about a month ago of the plans to sell its stake.

RBS owns 20.94bn shares in BoC, equivalent to 8.25 per cent of its share capital, making it the third-largest shareholder, behind the Chinese state-owned SAFE fund, which has slightly more than two-thirds of the bank’s shares.

UBS sold 3.38bn shares at a slight discount to the market price, generating proceeds of about $850m. It bought the stake for about $500m in 2005.

Temasek, which invested in BoC at the same time as UBS, has a 4.1 per cent stake. The Asian Development Bank and Japan’s Bank of Tokyo-Mitsubishi UFJ also have small stakes of about 0.2 per cent each.

UBS said it would remain “committed to its business relationship with Bank of China and to its businesses in China as a whole, where UBS will continue to develop its already strong client franchise”.

The Swiss bank, which this year received SFr6bn ($5.6bn) in a government bailout, acquired a 1.6 per cent of BoC before advising the Chinese lender on its 2006 public offering. UBS has offices in Beijing and Guangzhou and is licensed to trade Chinese renminbi-denominated A shares.

The sale of the BoC stake is UBS’s second disposal in as many weeks. Last week, it sealed a deal to sell its Canadian energy operations and global agricultural business to JP Morgan for an undisclosed amount.

UBS shares rose SFr0.39, or 2.7 per cent, to SFr14.84. However, they are trading at a fraction of its 52-week high of SFr45.97, or the SFr21 at which it launched a SFr15bn rights issue in May.

Copyright The Financial Times Limited 2008

Deutsche Börse/NYSE

Published: December 7 2008 18:50 | Last updated: December 8 2008 09:24

It was good while it lasted. Talks on a potential deal between Deutsche Börse and NYSE Euronext have apparently foundered before the market could even get excited about them.

EDITOR’S CHOICE

D Börse and NYSE end merger talks - Dec-07

Deutsche Börse pitches merger with NYSE Euronext - Dec-07

Talks highlight frailty of global exchanges - Dec-07

The rationale for consolidation has become increasingly clear. Stock exchanges are facing an unappetising combination of lower trading volumes and competition from alternative trading platforms. The incumbent exchanges have reacted to the latter: by cutting fees for the new breed of frequent traders, for instance, and by trying to capture some of the institutional trading now happening away from traditional venues. But the changing landscape of share trading is arguably less problematic for exchanges now than a fall in trading volumes that hurts everyone.

The concern over trading volumes is, like everything else in this crisis, surprising for its lack of obvious precedents. Indeed, exchanges have typically offered relative predictability in stormy times. Volumes in cash equities on the New York Stock Exchange increased during most recessionary periods (the 1987 crash excepted), according to one study by Citigroup of the past 30 years.

Even if things are worse this time, followers of exchanges had hoped, at least until recently, that trading volumes in derivatives would lend a helping hand. After all, generalised risk aversion should promote hedging activity, which should be good for derivatives. It seems not. Last month saw some volume declines in derivatives both in the US and Europe. Perhaps there is such a thing as too much volatility, even for derivatives.

Meanwhile, the pressure on Deutsche Börse from its two activist hedge fund shareholders is unlikely to wane. True, costs have been cut at Deutsche Börse but the synergies on offer from a tie-up with NYSE would surely have had a greater impact.

S Korea exchange closer to state control

By Christian Oliver and Song Jung-a in Seoul

Published: December 10 2008 23:00 | Last updated: December 10 2008 23:00

South Korea is one step away from bringing the country’s stock exchange under state control, a move that could sit uncomfortably with Seoul’s ambition to cast itself as a financial hub.

The National Board of Audit and Inspection in September recommended that it should supervise the accounting and management of Korea Exchange (KRX).

It argued the bourse was a monopoly and complained a long-promised initial public offering had never materialised. Korea Stock Exchange, Korea Futures Exchange and Kosdaq merged to form KRX in 2005.

On Wednesday, the Financial Services Commission, the regulator, told the Financial Times that it agreed with this proposal. It said: “We have passed our view to the ministry of finance, that we concurred with the audit board. Monopolistic revenues exceed 50 per cent of total revenue”.

Under Korean antitrust law, a company is considered a monopoly if its revenues exceed 50 per cent of the total industry.

The finance ministry, which has the last say in any decision, said it was reviewing the two rulings and would issue a final verdict next month.

Britain’s FTSE Group in September promoted Korea to developed country status, a decision analysts reckoned would attract billions of dollars in foreign investment. Total market capitalisation is Won633,000bn ($454bn).

One of the exchange’s executive directors said: “The government move basically means we will come under state control, regarding management, accounting and other business plans...It’s a step back and totally against global standards. Foreign institutional investors could lose confidence in our capital market, worried about government interference.”

The exchange is owned primarily by Korean securities firms, but JPMorgan Securities (Far East), Macquarie Securities, Prudential Investment & Securities and Citigroup Global Markets each have stakes of more than 2.8 per cent.

The audit board began its investigation into the exchange following a scandal involving one of KRX’s affiliates.

The decision over whether the state audit body will administer the exchange will weigh on plans to expand Korea’s interests into smaller stock markets such as Cambodia, Laos, Malaysia and Mongolia.

KRX has also said it is keen to boost trade by getting foreign companies to list in Seoul. Chinese companies have already done so.

In 2006, the audit board launched another case that became a litmus test for foreign investment in Korea, saying the acquisition of Korea Exchange Bank by Lone Star, a US buy-out firm, contained flaws, but cleared the Texan company of any wrongdoing.

Korean markets have suffered heavy falls during the economic crisis. Bellwether manufacturers are suffering and international investors rate Korea as a market from which they can bail out.

Copyright The Financial Times Limited 2008

《

中 国证券报》周三报导，中国第一重型机械集团公司(China First Heavy Industries, 简称：一重集团)已向中国证券监督管理委员会(China Securities Regulatory Commission, 简称：中国证监会)提交了首次公开募股(IPO)申请。报导没有说明消息来源。

报导没有透露IPO的时间安排或其他细节。

据报导，总部设在黑龙江的一重集团2007年实现销售收入人民币70.7亿元。

报纸网站：http://paper.cs.com.cn

2008年12点惨痛投资教训

2008 年 12 月 30 日 09:50

2

008年是令人痛苦的一年，不过从中学到宝贵经验教训的人不会两手空空地离开。你从中学到了什么教训或让你进一步加深了印象？我很想听一听。以下是让我感触很深的12点。

Associated Press

股市已经到底了？别傻到以为自己能抄底。

1. 你要对自己的财务状况负责。这意味着了解你的钱投资到哪里了，以及这样投资的原因。不要完全依赖理财顾问、投资组合经理或公司的计划上。毕竟，你将拥有最后的结果，而不是他们。

2. 绝不要完全相信某一位金融大师，不管他获得了多么高的推崇。谢天谢地，并没有多少人成为了马多夫(Bernie Madoff)。但华尔街最优秀的大部分高手今年仍亏损了至少40%。

3. 绝 不要投资于你不熟悉的领域。出于这个原因，多年来我一直拒绝推荐房利美(Fannie Mae)和房地美(Freddie Mac)的股票，尽管各种各样的市场人士大力推荐。想象一下当包括它们的首席执行长在内的所有人都无法真正了解它们时，我的轻松心情吧。简单的股票，如亚 马逊(Amazon)或安海斯-布希公司(Anheuser-Busch)就很少让你这么尴尬。

4. 增加投资，而非减少投资。是不是小孩子们也在嘲笑我？我不怪你们。你们的存款刚刚减少了至少40%。但风险上升而收益下降意味着你需要投资更多才能实现自己的目标。

5. 不要认为跟随大众投资比较安全。最“流行”的投资往往都出现最坏的结果──从科技股（1999年）到房地产（2004年）再到新兴市场（2006-07年）。

6. 你的奶奶总会是对的。省了一分钱就等于赚了一分钱。债务总是危险的。如果用信用卡借1万美元比找到一名还在工作的电工还要容易，那么经济就正在遇到麻烦。

7. 珀史密斯(Psmith)也是对的。珀史密斯是谁？他是英国伟大的喜剧作家沃德豪斯(P.G. Wodehouse)小说中的人物。他常常警告将“不同寻常与不可能”混淆起来的危险。显然刚过去的一年是不同寻常的，不过，太多的人却认为这一切是不可能的。

8. 拥有足够的债券。是的，它们没有股票那么刺激。不过重要的恰恰也是这点。将所有资金都“长期”投入到股票中没有什么用途，如果它们在你到达终点前就全军覆没的话。

9. 当有人向你提供明显的优质产品时，比如实际收益率4%的通货膨胀保值国债，就接受它。当向你推荐劣质产品时，如实际收益率为零的同类债券，则拒绝它。

10. 避免不必要的风险。那些投机花旗集团(Citigroup)、WaMu或通用汽车(General Motors)股票的人今年的损失超过了绝大多数人。最大的投资错误通常在于你所购买的，而不是你所错过的。

11. 不 要轻信专家的预测。当所有专家都持一致意见时，尤其需要注意。记住，大多数经济学家在过去4次衰退中曾成功地预测了12次，但却错过了这次。根据长期的经 验，当我看到“英镑2009年有望上涨 因知名策略师预计减息将放缓”（彭博资讯(Bloomberg)，12月30日）这样的标题时，我就担心可怜的英镑又要遭殃了。

12. 仍 试图预测近期的走势，或是市场的底部吗？的确，也许11月份（道琼斯指数跌至最低7550点）可能会是市场的底部。但人们在1月份时（道琼斯指数 11971点），3月份时（11740点），7月份时（10963点），9月份时（10365点）和10月份时（8176点）也都这么说过。无疑，他们总 有一天会说对的。

Brett Arends

本文网址:

中国股市微幅下挫 全年跌幅65% 2008 年 12 月 31 日 17:08 中 国股市周三收盘微幅下挫，受投资者仍对公司利润和国内经济感到担忧影响。本年度股市累计跌65%，为18年历史中表现最差的一个年度。 上证综合指数收盘跌0.7%，至1820.81点，市场交投清淡。深证综合指数跌1.3%，至553.30点。该指数全年跌62%。 分析师表示，2009年前几周上证综合指数可能将在1800-1900点的近期区间内波动。他们称，预计明年下半年中国经济才可能因全球经济走稳而受益，在此之前市场不会出现实质性的反弹。 中国金融市场本周四和周五将因元旦假日休市，下周一恢复交易。 国信证券(Guosen Securities)的分析师王军清表示，投资者信心依然疲弱，仍受到对中国经济前景和上市公司业绩的担忧拖累。 中国上市公司将从1月15日开始陆续公布2008年业绩。 天相投顾(TX Investment)分析师吴峰表示，针对1月中旬开始公布的2008年全年经济数据的担忧也对市场构成不利影响。 航空类股走低，因投资者担忧航空公司的燃油套期保值亏损可能进一步扩大。 东方航空(China Eastern Airlines)跌8.0%，至人民币4.13元。该公司周三表示，11月份实际发生燃油套期保值损失约42万美元。 其他持有大量燃油套期保值头寸的航空公司股价也告下挫。中国国航(Air China)收盘跌1.4%，至人民币4.10元；南方航空(China Southern Airlines Co.)跌3.6%，至人民币3.19元。 券商和银行类股下挫，在中国政府官员就金融行业发表的利好评论推动股市在早盘时段上涨后，投资者进行了获利回吐。 中国央行(People's Bank of China)行长周小川周二表示，央行制定政策时，会在考虑银行业利益的同时，兼顾证券业和保险业的利益。 长江证券(Changjiang Securities)跌0.6%，至人民币8.77元，该股在前市时段一度上涨2.4%；中国太保(China Pacific Insurance)收盘跌0.1%，至人民币11.12元，该股盘中早些时候的涨幅达2.2%。 本文网址: [URL] 免费登录华尔街日报中文网络版(cn.WSJ.com)，阅读更多精彩报导

China’s state sector urged to boost economy

By Jamil Anderlini in Beijing

Published: December 26 2008 18:37 | Last updated: December 26 2008 18:37

Senior government officials have publicly called on China’s state-owned sector to increase its dominance in the economy in response to rapidly cooling growth and plummeting profits.

Analysts say while no one in the Communist-controlled government favours a return to traditional central planning, advocates of continued state dominance of the economy are clearly ascendant in Beijing.

In comments reported by state media on Friday, Zhang Dejiang, vice-premier, “urged state-owned enterprises to further expand domestic and international markets . . . assume the responsibility and continue playing the leading role” in the economy in the face of the global crisis.

Li Rongrong, chairman of the state-owned Assets Supervision and Administration Commission, on Friday issued a decree to state-controlled holding companies telling them they must continue to “actively increase” their stakes in publicly listed subsidiaries.

China has moved from a centrally planned, wholly state-owned economy to a much more vibrant capitalist society over the past 30 years, but the Communist party has insisted on maintaining control over large parts of the economy it considers essential to keeping its grip on power.

“Technocratic ideology – the belief that for one reason or another the government is better suited to run the commanding heights of the economy – is very strong in China,” said Huang Yasheng, a management professor at MIT and author of the recent book Capitalism with Chinese Characteristics.

Within the private sector, many are wondering whether the government is implementing an approach known as guo jin min tui or “the state advances as the private sector recedes”.

Mr Li has denied that such a policy exists but government subsidies to state companies in the past two months have clearly put private enterprises at a disadvantage in many industries.

The state has handed out billions of renminbi to debt-ridden, lossmaking, state-controlled airlines while the country’s first privately owned airline has been forced to halt services.

Li Yizhong, minister of industry and information technology, this month said the government would “encourage big steel companies to acquire small ones”. Most big ones are state-owned while many of the small ones are private.

According to state media reports, the government had budgeted at least Rmb27bn ($4bn) in subsidies by the end of November to help state enterprises that are “important to national economic security” weather the economic crisis.

“The government is taking these measures to help these companies maintain employment growth and social stability,” said Ha Jiming, chief economist at China International Capital Corp, the Chinese investment bank.

“If a more market-oriented economy at this moment could help grow employment then the government would go for that, but right now increased state involvement in the economy is a common phenomenon everywhere in the world, including the US and Europe.”

If state-owned companies start playing an even bigger role in the economy, however, this will probably come at the expense of more profitable and efficient private companies.

Additional reporting by Kathrin Hille in Beijing

Copyright The Financial Times Limited 2008

China knocked off IPOs top slot

By Sundeep Tucker in Hong Kong

Published: December 28 2008 23:20 | Last updated: December 28 2008 23:20

Chinese stock exchanges raised just $22bn in initial public offerings in 2008. The slowdown means China will not finish the year as the leading centre for IPOs, falling behind New York for the first time since 2005.

Mainland companies last year raised $109bn on global exchanges, largely in Shanghai and Hong Kong. Forecasters, including Ernst & Young, tipped the same amount to be raised this year.

EDITOR’S CHOICE

In depth: Stock exchanges - Dec-28

China’s state sector urged to boost economy - Dec-26

Video: China shapes tomorrow’s cars - Dec-28

However, according to Dealogic, the data provider, IPOs of Chinese companies this year raised $14.6bn on the mainland and $7.4bn in Hong Kong – the lowest total for three years – plus $1bn on other global exchanges.

According to Dealogic, IPOs raised $25.4bn on the New York Stock Exchange, propelled by the $19.8bn listing of Visa in March, while $9.3bn was raised on the London Stock Exchange.

A total of 124 Chinese companies listed in 2008 compared with just 17 each in New York and London. The Dealogic figures assume there will be no further IPO activity this year.

Dealmakers in China and Hong Kong report pent-up demand for IPOs in 2009, though few expect a return to the heady days of 2007 when buyers bought stakes from owners at large valuation multiples.

Kester Ng, JPMorgan’s head of Asia-Pacific equity capital and derivatives markets, said: “IPOs will somewhat return in 2009 but will not experience the levels of 2006 or 2007.

“It will be a more subdued market, especially in the earlier part of 2009.”

Bankers said investors were likely to focus on secondary capital raisings in Asia, where they could acquire shares in companies such as banks at discounts, before being willing to consider possible new listings.

Beijing is expected to try to kickstart the moribund IPO market with the sale of state-owned assets.

This year’s four largest Chinese IPOs were of government-owned railway or energy assets, sectors that, with retail, healthcare and technology, are expected to provide further listings next year.

“Those companies that could IPO will be mostly larger cap stocks, and those which are leaders in their sectors,” Mr Ng said.

“Small caps are somewhat out of favour, and only the ones with very strong stories will be able to list.”

Copyright The Financial Times Limited 2008

FOR EDUCATIONAL USE ONLY

11 Harv. J.L. & Pub. Pol'y 101

Harvard Journal of Law and Public Policy

Winter, 1988

Changing the Law: The Role of Lawyers, Judges and Legislators

Symposium: The First Annual Federalist Society Lawyers Convention-1987

*101 IN DEFENSE OF THE REGULATION OF INSIDER TRADING

Saul Levmore [FNa1]

Copyright © 1988 by the Harvard Society for Law & Public Policy, Inc.; Saul

Levmore

The regulation of insider trading--transactions in the securities of a firm by persons possessing special information that is derived from their advisory or fiduciary relationship or their employment with the firm--has had strong support among those who look to noneconomic values to determine the proper role of government and the ideal content of laws in our society, but it has had much weaker support among observers who identify with the law-and-economics movement. In this essay, I argue that there is little reason to think that unregulated insider trading is a good thing. These comments stress the economic dangers of insider trading and indicate, in passing, that these dangers are related to those that underlie--but that are also insufficiently recognized in--the case for not regulating the behavior of managers seeking to thwart tender offers.

Part I of these comments compares the "disclose-or-abstain" scheme, the current strategy of our federal laws for regulating insider trading, with other schemes, including deregulation. Part II focuses on insider trading and mergers.

FOR EDUCATIONAL USE ONLY

32 J. Corp. L. 237

Journal of Corporation Law

Winter 2007

Article

*237 INSIDER TRADING LAWS AND STOCK MARKETS AROUND THE WORLD: AN EMPIRICAL

CONTRIBUTION TO THE THEORETICAL LAW AND ECONOMICS DEBATE

Laura Nyantung Beny [FNa1]

Copyright © 2006 University of Iowa (The Journal of Corporation Law); Laura

Nyantung Beny

Abstract

The primary goal of this Article is to bring empirical evidence to bear on the heretofore largely theoretical law and economics debate about insider trading. The Article first summarizes various agency, market, and contractual (or "Coasian") theories of insider trading propounded over the course of this longstanding debate. The Article then proposes three testable hypotheses regarding the relationship between insider trading laws and several measures of stock market performance. Exploiting the natural variation of international data, the Article finds that more stringent insider trading laws are generally associated with more dispersed equity ownership, greater stock price accuracy and greater stock market liquidity, controlling for various economic, legal and institutional factors. These results cast doubt on pure "Coasian" theories of insider trading and suggest the appropriate locus of academic and policy inquiries about the efficiency implications of insider trading and its regulation. Further empirical research is necessary, however, to conclusively resolve the perennial insider trading debate.

 

I. Introduction ........................................................... 239

II. The Law and Economics Debate over Insider Trading ..................... 241

  A. Agency Theories of Insider Trading ................................... 241

    1. Insider Trading as an Efficient Compensation Mechanism ............. 242

    2. Insider Trading as an Agency Cost .................................. 243

  B. Market Theories of Insider Trading ................................... 245

    1. Insider Trading and Stock Price Accuracy ........................... 246

      a. The Meaning and Economic Significance of Stock Price Accuracy .... 246

      b. The Law and Economics Debate about Insider Trading and Stock          

  Price Accuracy .......................................................... 247

    2. Insider Trading and Stock Market Liquidity ......................... 249

      a. The Meaning and Economic Significance of Stock Market Liquidity .. 249

      b. The Law and Economics Debate about Insider Trading and Stock          

  Market Liquidity ........................................................ 250

      c. A "Coasian" Approach to Insider Trading: Private Contracting ..... 252

III. Testable Hypotheses .................................................. 256

  A. Insider Trading Law and Ownership Concentration ...................... 256

  B. Insider Trading Law and the Information Content of Stock Prices ...... 258

  C. Insider Trading Law and Liquidity .................................... 261

IV. Description of the Data ............................................... 263

  A. Data Sources ......................................................... 263

    1. The Dependent Variables ............................................ 263

    2. Insider Trading Regulation and Enforcement ......................... 264

      a. Insider Trading Law Variables .................................... 264

      b. Enforcement Environment .......................................... 266

    3. Additional Economic, Legal and Institutional Variables ............. 268

  B. Descriptive Statistics ............................................... 270

V. Regression Analysis of Insider Trading Law and the Stock Market ........ 273

  A. Insider Trading Law and Corporate Ownership .......................... 273

  B. Insider Trading Law and Stock Price Informativeness .................. 275

  C. Insider Trading Law and Stock Market Liquidity ....................... 277

  D. Interaction of Sanctions and Public Enforcement Power ................ 278

  E. Summary and Discussion of Results .................................... 279

VI. Conclusion and Implications for the Theoretical Law and economics          

  Debate .................................................................. 280

 

*239 I. Introduction

The law and economics debate about the desirability of prohibiting insider trading--trading by corporate insiders on material, non-public information--is both long-standing and unresolved. The early legal debate centered on whether insider trading is unfair to public investors who are not privy to private corporate information. [FN1] However, the fairness inquiry was malleable, lacked a rigorous theoretical framework, and therefore did not yield coherent or practical policy prescriptions. [FN2] Professor Henry Manne abruptly shifted the debate to an efficiency inquiry with his now classic 1966 book, Insider Trading and the Stock Market. In Insider Trading and the Stock Market, Manne argued that, contrary to the prevailing legal and moral opinion of the time, insider trading is desirable because it is economically efficient. [FN3] Professor Manne's controversial thesis abruptly shifted the focus from fairness to the economics of insider trading and precipitated an intense debate in the law and economics literature about the efficiency implications of insider trading. [FN4] The central question in the law and economics debate is whether insider trading is economically inefficient and thus ought to be subject to government regulation or, conversely, whether it is economically efficient and thus ought not to be regulated. Law and economics scholars sit on both sides of the fence. Some even straddle the fence, for example, by arguing that even if insider trading might be inefficient (bad) for some firms, it might be efficient (good) for other firms, and therefore the law should enable corporations and shareholders to address insider trading via private contract on a case by case basis. Without question, the law and economics approach has advanced the legal policy debate about insider trading, but it has not achieved consensus on fundamental questions.

The law and economics literature on insider trading is plagued by a few significant shortcomings. Like the fairness inquiry, the efficiency inquiry is rather elusive, as no single locus of efficiency focuses the scholarly debate. Rather, the investigations vary from examinations of the narrow effects of insider trading on efficiency at the firm level (agency theories of insider trading) to work studying the broader effects of insider trading on stock market efficiency (market theories of insider trading). [FN5] It is possible, for *240 example, that insider trading may enhance efficiency within the firm, but that markets in which insider trading is permitted are thereby less efficient in the aggregate. Researchers who focus their studies at different levels and report different results could be talking past each other. A second, major deficiency of the law and economics literature on insider trading is that it is insufficiently grounded in empirical evidence, although, as Professors Carlton and Fischel note, the "desirability of [regulating] insider trading is ultimately an empirical question." [FN6] Rather, beginning with Professor Manne's seminal argument, law and economics scholarship on insider trading has been largely speculative and theoretical. Finally, until recently, the existing empirical literature on insider trading has been American-centered. [FN7] Few scholars have sought to examine the impact of insider trading rules in a comparative context. This is important because, without variation in insider trading rules, one cannot test causal hypotheses.

This Article, unlike most of the existing legal scholarship on insider trading, is empirical and comparative. [FN8] The main aim is to determine whether insider trading laws are systematically related to stock market performance across countries. To that end, the Article formulates three testable hypotheses regarding the relationship between insider trading laws and equity ownership, the informativeness of stock prices, and stock market liquidity, respectively. These hypotheses are that countries with more stringent insider trading laws will have: (a) more widespread equity ownership; (b) more informative stock prices; and (c) more liquid stock markets, other things equal. To test these hypotheses, I constructed a unique index of the stringency of insider trading laws for thirty-three countries as of the mid-1990s. Using multivariable regression analysis, [FN9] I find that countries with more stringent insider trading laws have more dispersed equity ownership; more liquid stock markets; and more informative stock prices, consistent with the formulated hypotheses. Because of the small number of available cases and the impossibility of controlling for all potentially relevant variables, these conclusions must be regarded as tentative, but they are nonetheless significant. If insider trading laws are *241 detrimental, as Professor Manne and others have posited, the pattern I find would have been unlikely.

The Article is organized as follows: Part II reviews the theoretical law and economics debate about the desirability of regulating insider trading, categorizing the theories of insider trading into two broad groups, agency theories and market theories; Part III formulates three testable hypotheses that emerge from the theoretical literature; Part IV describes the data and presents summary statistics; Part V presents and discusses the results of multivariable regression analysis; and finally, Part VI concludes by addressing some of the implications of this Article's findings for the theoretical law and economics debate about insider trading. In particular, I argue that this Article's findings tend to support the arguments of legal scholars who argue that insider trading regulation has a beneficial impact on stock markets. However, more empirical work is necessary to conclusively resolve the theoretical debate.

FOR EDUCATIONAL USE ONLY

35 Stan. L. Rev. 857

Stanford Law Review

May, 1983

*857 THE REGULATION OF INSIDER TRADING

Dennis W. Carlton [FNa]

Daniel R. Fischel [FNaa]

Copyright © 1983 by the Board of Trustees of the Leland Stanford Junior

University; Dennis W. Carlton and Daniel R. Fischel

Imagine two firms, A and B, which are identical in all respects except that, in its charter, firm A prohibits the trading of its shares based on inside (nonpublic) information. The firm requires insiders (employees) to report their trades, which a special committee or an independent accounting firm then checks to ensure compliance with the charter provision. Firm B, by contrast, neither prohibits insider trading nor requires reporting. Insiders openly trade shares of firm B and regularly earn positive abnormal returns. In competitive capital markets, which charter provision will survive?

Despite the deceptive simplicity of this question, it has no obvious answer. [FN1] The consensus, to the extent that any exists, appears to be that firm A's charter will survive because it eliminates various perceived*858 harmful effects of insider trading. Thus, investors would pay less for shares in B. The managers of B, in order to maximize the value of B shares, would have to adopt a similar charter provision.

As for these harmful effects, many believe that insider trading is "unfair" and undermines public confidence in capital markets. [FN2] Other critics have argued that insider trading creates perverse incentives by allowing corporate managers to profit on bad news as well as good, [FN3] encourages managers to invest in risky projects, [FN4] impedes corporate decisionmaking, [FN5] and tempts managers to delay public disclosure of valuable information. [FN6] Some also have argued that insider trading is an inefficient compensation scheme because, in effect, it compensates risk-averse managers with a benefit akin to lottery tickets. [FN7] Still others have claimed that insider trading allows insiders to divert part of the firm's earnings that would otherwise go to shareholders and therefore raises the firm's cost of capital. [FN8] Under this "insider trading is harmful to investors" hypothesis, competitive capital markets would force firm B to prohibit insider trading.

The difficulty with this hypothesis is that it appears to be contradicted by the actions of firms. Although no one has conducted rigorous empirical research in this area, it is generally believed that firms have made little, if any, attempt to prohibit insider trading, at least until very recently and then perhaps only a response to regulation. [FN9] Today the area is federally regulated, [FN10] but the federal insider *859 trading prohibitions are limited, have rarely been enforced, and have had little observable effect on insider trading. [FN11] Indeed, numerous empirical studies have demonstrated that insider trading is widespread and is highly profitable-insiders systematically outperform the market. [FN12] Critics of insider trading have offered no explanation for why firms have made so little attempt to prohibit insider trading.

Critics of insider trading also should predict that insiders who outperform the market reduce their compensation in labor markets. Just as a manager who is known to shirk or to make poor investment decisions will consequently command lower compensation, so should a manager who is known to trade on inside information and earn abnormal positive returns, as revealed by his reported trades. [FN13] Yet no evidence even suggests that managers who report profitable trades thereby decrease the value of their human capital.

*860 Also puzzling is the common law which, in the main, permitted insider trading. [FN14] Because capital is highly mobile, firms, in order to attract investors, have strong incentives to incorporate in states that have efficient corporation laws. [FN15] Because incorporations are profitable to the state, the states in turn have strong incentives to provide a set of legal rules that maximize shareholders' welfare. If eliminating insider trading produced gains, states that prohibit insider trading would have a comparative advantage over other states, and firms that incorporated in such states would have a comparative advantage over other firms. Yet no evidence suggests that this has occurred.

Similarly, insider trading in the capital markets of many other countries historically has been subject either to regulations that have not been enforced or to no regulation at all. [FN16] This phenomenon, like the absence of domestic private and state prohibitions, suggests that the question of the desirability of insider trading is far more complex than commonly assumed.

Finally, insider trading in this country, despite the widespread perception to the contrary, is generally permitted. A fundamental difference exists between the legal and economic definitions of insider trading. Insider trading in an economic sense is trading by parties who are better informed than their trading partners. Thus, insider trading in an economic sense includes all trades where information is asymmetric. This definition includes all trades, whether or not in securities, where one of the parties has superior information. By contrast, federal law has focused on purchases or sales by certain insiders within a 6- month period or on trading on the basis of "material" *861 information by a broader, more amorphous group of insiders or their tippees. Insider trading in an economic sense need not be illegal. [FN17] The law never has attempted to prohibit all trading by knowledgeable insiders.

For purposes of analyzing whether insider trading is beneficial or detrimental, nothing turns on whether a particular trade is illegal. In assessing the arguments for and against insider trading, therefore, we will focus on trading by managers or other employees in securities of their own firms based on superior knowledge regardless of whether the trade is illegal. We emphasize, however, that the arguments for and against insider trading may apply equally to trading by others. [FN18]

We attempt in this article to analyze critically the arguments in favor of prohibiting insider trading and to suggest why allowing the practice may be an efficient way to compensate corporate managers. [FN19] Part I demonstrates that the insider trading debate is really a debate about whether the firm, as a matter of contract, should be able to allocate property rights in valuable information to managers or to investors. We argue that the parties' self-interest will lead them to reach by private agreement the optimal allocation of what is simply one element of a compensation arrangement. We discuss in Part II several incentive and information effects which suggest that there may be gains from allocating property rights in valuable information to managers as opposed to investors. These gains may explain the lack of pervasive private, common law, and foreign and domestic restraints on insider trading. Part III analyzes some of the numerous objections to insider trading. The various legal rules regulating insider trading are critically analyzed in Part IV. Part V is a conclusion.

........

Pacific Rim Law and Policy Journal

March, 2001

Article

*327 AN OUTSIDER'S VIEW ON CHINA'S INSIDER TRADING LAW

Charles Zhen Qu [FNd1]

Copyright © 2001 Pacific Rim Law and Policy Association; Charles Zhen Qu

an interesting review of a "comparative law" book on china's insider trading law

FOR EDUCATIONAL USE ONLY
4 J.L. Econ. & Pol'y 465

Journal of Law, Economics & Policy Spring, 2008
INSIDER TRADING SYMPOSIUM -- JANUARY 27, 2007 Book Review
*465 HUI HUANG'S INTERNATIONAL SECURITIES MARKETS: INSIDER TRADING LAW IN CHINA (2006)
Richard A. Booth [FNa1]
Copyright © 2008 Journal of Law, Economics & Policy; Richard A. Booth

In International Securities Markets: Insider Trading Law in China, [FN1] Hui Huang, [FN2] has undertaken to describe the state of insider trading law in China and the rest of the world--particularly the United States--and to suggest how the law of China should be applied in the context of China's emerging economy and markets. Needless to say, this is a prodigious task. The law of insider trading in the United States has been evolving since at least 1961, when the SEC decided In re Cady, Roberts. [FN3] But even with almost fifty years of experience, the debate continues in the United States about what constitutes insider trading, how the law should address it, and indeed whether it should be illegal at all. To complicate matters further, other countries have adopted approaches to insider trading that differ significantly from that of the U.S. [FN4]

In China, there is no lack of law relating to insider trading. As Huang describes it, the securities law of China (as adopted in 1999) includes five articles in the civil code that specifically address insider trading, plus one other that sets forth twelve categories of information deemed to be material and so presumably to define the kind of information that might give rise to insider trading. [FN5] According to Huang, these provisions were taken directly from U.S. law. The problem is that it is unclear what this law means and how it should be applied. Should China follow the U.S. and interpret the law of insider trading as based ultimately on fiduciary duty as in Chiarella, *466 Dirks, and O'Hagan? [FN6] Huang finds this theory confusing if not incoherent. Moreover, China does not have a well-developed law of fiduciary duty. [FN7]

In the end, Huang finds U.S. law wanting and recommends that China adopt what he calls the equality of access theory of insider trading, which he carefully distinguishes from the parity of information theory. [FN8] Huang, who seems to have read almost all of the U.S. scholarship on insider trading, suggests that the U.S. shied away from the former because of confusion that it meant the latter. [FN9] To the contrary, I would argue that U.S. law is about equality of access as Huang advocates. The ultimate question in the U.S. fiduciary duty-based system is how one obtains material nonpublic information, and thus whether it may lawfully be used for personal gain.

This is strange reading for someone from the common law tradition. The notion that one could have a well developed law of insider trading set down in a civil code and yet not know what it means is bizarre. In the U.S., as Holmes aptly put in The Common Law, the life of the law has been experience. We adopt statutes after we find a problem that does not respond to common law solutions.

In China, there have been eleven cases of insider trading since 1991. [FN10] Although Huang suggests that this constitutes vigilant enforcement, he nonetheless devotes considerable space to the question of whether insider trading is a problem in China and why. [FN11] He describes his book as a qualitative empirical study of insider trading. By that, he means that it was based on thirty-one interviews with regulators, market professionals, directors, investors, lawyers, judges, journalists, and academics. [FN12] On the basis of this study, Huang concludes that insider trading is widespread and harmful. [FN13] Huang seems to think that it is very important for China to crack down on insider trading because the U.S. does so. The idea seems to be that for the market to be robust, it must emulate the U.S. market.

For an American reader, one of the more interesting features of the book is its description of the Chinese stock markets and corporation law. Turnover is much higher in China than it is in the U.S. In 1998, turnover on the Shanghai Exchange was 355% compared with 70% on the New York Stock Exchange. [FN14] But these numbers are deceptive in that, as of 1998, only about 34% of the shares of companies listed on the Shanghai exchange *467 were tradable. [FN15] Thus, it would appear that the rate of turnover in China is about fifteen times what it is in the U.S. That suggests that there is much more stock-picking going on in China than in the U.S. [FN16] Accordingly, investors in China should be much more worried about insider trading than U.S. investors, who appear to follow more of a buy-and-hold strategy. (There is no mention in the book of mutual funds or other institutional investors, except for brokerage houses that appear to be engaged in active trading.)

Huang argues that insider trading is widespread in China because, among other reasons, there are problems with executive compensation and the law governing corporations. [FN17] According to Huang, the median salary of directors and senior officers in China was about $4,000 in 1998. [FN18] For example, the chairman of Houjian Corporation was paid $4,400 in 1998, while his corporation had sales of about $1 billion dollars that same year. [FN19] Stock options are not widely used in China. There are several reasons for this. Generally speaking, Chinese corporations do not have authorized but unissued shares. Nor are they permitted to buy back their own shares except in very limited circumstances. Also, officers and directors cannot sell their shares while they remain in office. [FN20]

Moreover, according to Huang, the Chinese government controls the number of listed companies in China with a quota system of sorts. [FN21] Thus, it appears that many companies seek a listing on one of the stock exchanges and proceed to sell stock before they have figured out what to do with the money. [FN22] The suggestion seems to be that a listing is seen as a license to engage in insider trading. Although Huang does not say so, I suspect that insiders account for most of the trading in China. In other words, it seems likely that much of the volume in China comes from insiders trading in each other's stocks.

It is telling that all eleven of the insider trading cases arising in China since 1991 have involved traditional insiders or issuers. [FN23] In the U.S., most of the notable cases have involved outsiders. Traditional insiders seem to know where the lines are drawn. This suggests that U.S. insider trading law may be more about leaks and keeping secrets than it is about fairness.

*468 Although Huang recognizes that there are significant problems with corporate governance and executive compensation in China, he devotes most of a chapter to lambasting the idea--first propounded by Henry Manne--that insider trading is a victimless crime that likely makes the market more efficient. [FN24] This is particularly ironic in that Manne advocates insider trading as a medium of executive compensation.

While I am sure that Manne would disagree, the largely option-based system of executive compensation that we have in the U.S. today is quite similar to what he advocated in 1966. Options can be seen as legalized insider trading, albeit with advance disclosure to investors and a cap on the number of shares, and without the risk that goes with the need to buy shares before disclosure of market moving news. [FN25] In this setting, secretive insider trading is a bad thing. It upsets the bargain between officers and investors. Witness the flap over timing and backdating in connection with option grants. [FN26] Indeed, I would argue that we could improve on the system we have if option grants were announced in advance or the exercise price were set shortly after a grant.

Huang devotes yet another long chapter to the need for private securities litigation. There, he discusses at length the problem of devising a remedy when no one seems to suffer harm. [FN27] As I have argued elsewhere, diversified buy-and-hold investors can tolerate what one might call honest securities fraud--fraud without insider trading--but they would favor a remedy in cases in which insiders use the occasion to extract gain from the market. The remedy should be disgorgement of gain (or loss avoided) to the issuer. [FN28] This is quite the opposite of the system we have that grants a windfall remedy to traders in securities fraud class actions but effectively denies a civil remedy for insider trading. To his credit, Huang discusses (in a footnote) the possibility of issuer recovery as a remedy for insider trading, but he dismisses it because the issuer suffers no harm and, as a non-trader, has no standing to sue under Blue Chip Stamps. [FN29] To the contrary, in a market composed primarily of diversified investors, issuer recovery works just fine. When the issuer recovers, investors recover because the value of the issuer increases by just the amount extracted by the insider. The fact that stockholders may have traded in the meantime is of little concern when *469 they own two hundred to three hundred different stocks (as most who invest through institutions, such as mutual funds and pension plans, effectively do). It all comes out in the wash. As for standing to sue, Huang understandably misses the rather fine point of our federal system that the issuer can always sue insiders who gain from a breach of fiduciary duty. [FN30]

It is not clear to me that anyone should seek to emulate U.S. law in this area. But it is quite clear that an emerging economy like China has problems that differ from those that arise in an economy with well-developed corporation law, established markets, and diversified investors. The bottom line is that China should fix its corporations law before it worries too much about insider trading.

*470 This page intentionally left blank.
[FNa1]. Richard A. Booth is the McGuinn Professor of Business Law at Villanova University School of Law. His recent research focuses on the impact of investor diversification on a range of corporation and securities law issues.

[FN1]. HUI HUANG, INTERNATIONAL SECURITIES MARKETS: INSIDER TRADING LAW IN CHINA (Kluwer Law International, 2006).

[FN2]. Hui Huang is a Lecturer in Law at the University of New South Wales, where he specializes in business law.

[FN3]. See generally In re Cady, Roberts & Co., 40 S.E.C. 907 (1961).

[FN4]. HUANG, supra note 1, at 177-79, 197-203.

[FN5]. Id. at 22-23, 125-30.

[FN6]. Chiarella v. United States, 445 U.S. 222 (1980); Dirks v. S.E.C., 463 U.S. 646 (1983); United States v. O'Hagan, 521 U.S. 642 (1997).

[FN7]. HUANG, supra note 1, at 163-67.

[FN8]. Id. at 170-73.

[FN9]. Id. at 173-77, 321-39.

[FN10]. Id. at 28-37.

[FN11]. Id. at 37-93.

[FN12]. Id. at 311-15.

[FN13]. Id. at 37-56, 95-124.

[FN14]. Id. at 62.

[FN15]. Id. at 13.

[FN16]. Indeed, one study indicates that in recent years, turnover in China has been higher than in any other country in the world. See Utpal Bhattacharya & Neal E. Galpin, The Global Rise of the Value-Weighted Portfolio, AFA 2007 Chicago Meetings Paper (November 2005), available at http:// papers.ssrn.com/sol3/papers.cfm?abstract_id=849627 (last visited May 27, 2008).

[FN17]. HUANG, supra note 1, at 66-68.

[FN18]. Id. at 66-68.

[FN19]. Id. at 67.

[FN20]. Id. at 67.

[FN21]. Id. at 65-66.

[FN22]. There does not appear to be any law in China that is the equivalent of the 1933 Act in the U.S.

[FN23]. HUANG, supra note 1, at 46-48.

[FN24]. Id. at 95-124.

[FN25]. Incidentally, options avoid the two biggest problems that Manne largely ignored: the incentive to delay disclosure and the potential for gain from a decline in price.

[FN26]. See Richard A. Booth, The Missing Link Between Insider Trading and Securities Fraud, 3 J. Bus. Tech. L. (2008), available at http:// papers.ssrn.com/sol3/papers.cfm?abstract_id=975949 (last visited May 27, 2008).

[FN27]. HUANG, supra note 1, at 253-305.

[FN28]. See Richard A. Booth, The End of the Securities Fraud Class Action as We Know It, 4 Berkeley Bus. L.J. 1 (2007), available at http:// law.bepress.com/expresso/eps/978/ (last visited May 27, 2008).

[FN29]. HUANG, supra note 1, at 303 n.280; Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730-31 (1975).

[FN30]. See Booth, supra note 26.
END OF DOCUMENT