Do Investors in Controlled Firms Value Insider Trading Laws? International Evidence

This article characterizes insider trading in controlled firms as an agency problem. Using a standard agency model of corporate value diversion through insider trading by a controlling shareholder, I derive testable hypotheses about the relationship between corporate value and insider trading laws. The article tests these hypotheses using cross-sectional data on firms from a group of developed countries. The results show that stringent insider trading laws and enforcement are associated with greater corporate valuation among firms in common law countries, a result that is consistent with the claim that insider trading laws can mitigate agency costs. In contrast, insider trading laws and enforcement are generally insignificant to corporate valuation among firms in civil law countries. These results are robust to alternative regression specifications and to controlling for a variety of relevant factors and they suggest that the firm-level impact of insider trading regulation may depend on the local context in which it is applied

Insider Trading Laws and Stock Markets Around the World (Former title: Do Insider Trading Laws Matter? Some Preliminary Comparative Evidence)

The primary goal of this article is to bring empirical evidence to bear on the largely theoretical law and economics debate about insider trading. The article first summarizes various agency cost and market theories of insider trading propounded over the course of this perennial debate. The article then proposes three testable hypotheses regarding the relationship between insider trading laws and several measures of stock market performance. Using international data, the paper finds that more stringent insider trading laws are generally associated with more dispersed equity ownership, greater stock price accuracy and greater stock market liquidity. These results suggest the appropriate locus of academic and policy inquiries about the efficiency implications of insider trading

Insider Trading Rules Can Affect Attractiveness of Country\u27s Stock Markets

The following essay is based on testimony the author delivered to the U.S. Senate Judiciary Committee on September 26, 2006. The academic debate about the desirability of prohibiting insider trading is longstanding and as yet resolved. The legal academic literature on insider trading suffers from a few significant shortcomings. In brief, legal scholars who believe that insider trading is efficient and thus ought not to be prohibited maintain that insider trading increases managers\u27 (and other insiders\u27) incentives to behave in the interest of stockholders; makes stock prices more informationally efficient (that is, more accurate); and/or does not decrease the liquidity of the stock market. In contrast, legal scholars who believe that insider trading is inefficient and thus ought to be prohibited argue that insider trading reduces managers\u27 (and other insiders\u27) incentives to behave in the interest of stockholders; makes stock prices less informationally efficient (that is, less accurate); and/or decreases sotck market liquidity

A Comparative Empirical Investigation of Agency and Market Theories of Insider Trading

The paper summarizes various agency cost and market theories of insider trading propounded over the course of the perennial law and economics debate over insider trading. The paper then suggests three testable hypotheses regarding the relationship between insider trading laws and several measures of financial performance. Using international data and alternative regression specifications, the paper finds that more stringent insider trading laws and enforcement are generally associated with greater ownership dispersion, greater stock price accuracy and greater stock market liquidity. This set of findings provides empirical support to theoretical arguments in favor of more stringent insider trading legislation and enforcement

Insider Trading Laws and Stock Markets Around the World (Former title: Do Insider Trading Laws Matter? Some Preliminary Comparative Evidence)

The primary goal of this article is to bring empirical evidence to bear on the largely theoretical law and economics debate about insider trading. The article first summarizes various agency cost and market theories of insider trading propounded over the course of this perennial debate. The article then proposes three testable hypotheses regarding the relationship between insider trading laws and several measures of stock market performance. Using international data, the paper finds that more stringent insider trading laws are generally associated with more dispersed equity ownership, greater stock price accuracy and greater stock market liquidity. These results suggest the appropriate locus of academic and policy inquiries about the efficiency implications of insider trading

What Explains Insider Trading Restrictions? International Evidence on the Political Economy of Insider Trading Regulation

This article investigates the determinants of insider trading regulation across countries. The article presents a political economy analysis of such regulation that takes into account both private (distributional) and public (economic efficiency) considerations. The model cannot be tested directly because the relevant private preferences and social costs are unobservable. However, existing theories of capital market development suggest that various observable social factors can explain the diversity of insider trading policies across countries. In turn, these social factors should reveal the underlying preferences and social costs motivating such regulation. The main finding, based on data from a cross section of countries between 1980 and 1999, is that a country’s political system and not its legal or financial system provides the first-order explanation of its proclivity to regulate insider trading. Specifically, more democratic political systems enacted and enforced insider trading laws earlier than less democratic political systems, controlling for wealth, financial development, legal origin, and measures of latent social factors. In addition, left-leaning governments were relative latecomers to insider trading legislation and enforcement relative to right-leaning and centrist governments, controlling for the same factors as above. The findings are consistent with the political theory of capital market development and inconsistent with the legal origins theory of capital market development. They also challenge theoretical claims that insider trading restrictions are market-inhibiting because the kinds of governments that appear more prone to regulate insider trading are precisely the governments that are generally thought to pursue market-promoting policies

Insider Trading Rules Can Affect Attractiveness of Country\u27s Stock Markets

The following essay is based on testimony the author delivered to the U.S. Senate Judiciary Committee on September 26, 2006. The academic debate about the desirability of prohibiting insider trading is longstanding and as yet resolved. The legal academic literature on insider trading suffers from a few significant shortcomings. In brief, legal scholars who believe that insider trading is efficient and thus ought not to be prohibited maintain that insider trading increases managers\u27 (and other insiders\u27) incentives to behave in the interest of stockholders; makes stock prices more informationally efficient (that is, more accurate); and/or does not decrease the liquidity of the stock market. In contrast, legal scholars who believe that insider trading is inefficient and thus ought to be prohibited argue that insider trading reduces managers\u27 (and other insiders\u27) incentives to behave in the interest of stockholders; makes stock prices less informationally efficient (that is, less accurate); and/or decreases sotck market liquidity

Private Regulation of Insider Trading in The Shadow of Lax Public Enforcement (and a Strong Neighbor): Evidence from Canadian Firms

Few studies have examined firms’ voluntary self-regulation of insider trading. In this article, we investigate the characteristics of Canadian firms that voluntarily adopt policies restricting trading by their insiders when they are already subject to insider trading laws. We hypothesize that certain firm-specific characteristics -- such as larger size, higher market-to-book ratio, greater firm-specific uncertainty, the presence of controlling shareholders, and cross-listing into the United States where insider trading laws are more vigorously enforced -- are positively related to a firm\u27s propensity to adopt an insider trading policy (ITP), because insider trading is likely to be more costly for firms with these characteristics. We test these hypotheses using data on Canadian firms included in the Toronto Stock Exchange/Standard and Poor’s (TSX/S&P) Index. Using an ordered probit analysis, we find that larger firms, firms that have more than one controlling shareholder, firms with greater firm-specific uncertainty, and firms that are cross-listed in the United States, where public enforcement of insider trading laws is more frequent and severe than in Canada, tend to have ITPs that are stricter than required by Canadian insider trading law (i.e., super-compliant ITPs). Our results suggest that firms do not randomly restrict insider trading, but rather do so predictably and with a predictable level of intensity. They thus challenge the claim that firms are merely window dressing by adopting ITPs. Our results also illustrate the strong extra-territorial effects of U.S. securities laws and enforcement on Canadian firms. In addition, they suggest that formal organizational rules may dominate private sanctions in this context, consistent with norms/trust theories of organizational rules rather than economic deterrence theories of such rules. On net, our empirical results support the case made by those who see insider trading as economically harmful to firms

Private Regulation of Insider Trading in The Shadow of Lax Public Enforcement (and a Strong Neighbor): Evidence from Canadian Firms

Few studies have examined firms’ voluntary self-regulation of insider trading. In this article, we investigate the characteristics of Canadian firms that voluntarily adopt policies restricting trading by their insiders when they are already subject to insider trading laws. We hypothesize that certain firm-specific characteristics -- such as larger size, higher market-to-book ratio, greater firm-specific uncertainty, the presence of controlling shareholders, and cross-listing into the United States where insider trading laws are more vigorously enforced -- are positively related to a firm\u27s propensity to adopt an insider trading policy (ITP), because insider trading is likely to be more costly for firms with these characteristics. We test these hypotheses using data on Canadian firms included in the Toronto Stock Exchange/Standard and Poor’s (TSX/S&P) Index. Using an ordered probit analysis, we find that larger firms, firms that have more than one controlling shareholder, firms with greater firm-specific uncertainty, and firms that are cross-listed in the United States, where public enforcement of insider trading laws is more frequent and severe than in Canada, tend to have ITPs that are stricter than required by Canadian insider trading law (i.e., super-compliant ITPs). Our results suggest that firms do not randomly restrict insider trading, but rather do so predictably and with a predictable level of intensity. They thus challenge the claim that firms are merely window dressing by adopting ITPs. Our results also illustrate the strong extra-territorial effects of U.S. securities laws and enforcement on Canadian firms. In addition, they suggest that formal organizational rules may dominate private sanctions in this context, consistent with norms/trust theories of organizational rules rather than economic deterrence theories of such rules. On net, our empirical results support the case made by those who see insider trading as economically harmful to firms