Topic：The Impact of the Insider Trading Pledging Regulation on Stock Trading and Firm Valuation
Presenter：Guannan Zhou, Professor, Taiwan Chengchi University
Time：February 17, 2017（Friday）10：00 - 11:30
Venue：Room 205, Jiageng Bld 2
Abstract：Previous research suggests that insiders’ shareholding pledges are associated with agencyproblems. However, how investors evaluate and react to such behavior is less clear. Weinvestigate the stock market reactions to three insiders’ shareholding pledging regulatoryevents in Taiwan. The first event in 2007 limited the amount of bank loans as a percentage ofinsiders’ stock pledging value (the pledge value rule event). The second event is the firstreading of the 2011 Company Act amendment (the first reading event), which was an attemptto improve minority shareholder protection by restricting the voting rights of pledged sharesexceeding one-half of the shares held by a director on election. The third event is the passage ofthe amendment (the passage event). We show that firms with insiders making share pledgesexperience significantly higher stock returns around events compared to those without suchinsiders. In addition, the results are more significant for firms with small board of directors’shareholdings, when the agency problem is likely to be more severe. These results areconsistent with the alignment hypothesis that firms that are less compliant with the rulesbenefit more from legislative changes. We also find that institutional investors increased theirshareholdings of pledging (less compliant) firms after the passage event, indicating that areduction in agency problems increases institutions’ willingness to hold shares of lesscompliant firms. Our results have important implications on how ameliorating the legal systemcan help to improve investor protection.