Abstract: Taking the enquiry letters of annual reports in China’s Shenzhen Stock Exchange and the reply letters from the companies as the research samples, this paper investigates the scale of the reduced shares held by the insiders before and after the disclosure of the supervision letters in the annual reports and the market responses to these disclosures. The findings show that: (1) the scale of reduced share held by the insiders during the return period of the enquire letters in the annual reports is significantly higher than that during the control period, the insiders have the time-selecting behaviors that they would take the opportunity of their information advantage during the return period to conduct transactions; (2) after the enquiry letters in annual reports and the return letters, there appear negative stock price responses, and the samples of the insiders’ reducing share holding before the disclosure have more significant negative share price responses, indicating that these letters would reveal sensitive information, so that the insiders try to avoid their losses caused by the future stock price decline through reducing their holding shares in advance; (3) timely responses to the annual report enquiry letters are conductive to clarifying the problems to the investors, whether the insiders reduce the shares they hold during the return period for the enquire letters of the annual reports or not, the market reaction to the samples of the letters with no overdue responses is all better than that to the sample letters with overdue responses.

Key words: Annual report supervision; reducing holding-shares by the insiders; market response; annual report enquiry letters