Investigation of Market Efficiency : An Event Study of Insider Trading in the Stock Exchange of Hong Kong ∗

Since Great Britain’s return of Hong Kong’s sovereignty to the Chinese government in 1997, attention has been increasingly directed at the degree of market efficiency in the post-handover Hong Kong stock market. This study uses a sample of 542 corporate news announcements from January 1994 through December 2000 of Hong Kong and China-affiliated firms that are listed on the Stock Exchange of Hong Kong. I examine the efficiency of the Hong Kong stock market by investigating the abnormal price and volume performances surrounding the corporate news announcements. Data of U.S. stocks are also used and serve as benchmarks for a comparative analysis of the relative market efficiencies. This paper finds that there is very little unusual price and volume behavior for both Hong Kong and U.S. stocks. There exists, however, strong evidence that points towards suspicious insider-trading activities among the Red-Chips and H-share stocks of the China-affiliated firms that are listed in Hong Kong, where significant abnormal returns abound prior to the arrival of good news announcements. ∗A big thank-you to my advisor, John Shoven. Without his extraordinary guidance, insight, and support, this thesis would not have been possible. I would also like to thank J for his invaluable assistance and encouragement throughout the project. And my eternal love and thanks to my family, to whom I am dedicating this thesis. All errors and opinions expressed herein are my own.