The Unanticipated Effects of Insider Trading Regulation

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The Unanticipated Effects of Insider Trading Regulation

Author Info

Art A. Durnev ()
Amrita S. Nain ()

Abstract

Using a sample of 2,827 firms from 21 countries we examine whether insider trading laws achieve the primary objective for which they are introduced – protecting uninformed investors from private information-based trading. We find that when control is concentrated in the hands of a large shareholder, insider trading regulation is less effective in reducing private information-based trading if investor protection is poor. We suggest that controlling shareholders who are banned from trading may resort to covert expropriation of firm resources, creating more information asymmetry and thereby encouraging private information trading by informed outsiders. Consistent with this, we find evidence that when the rights of controlling shareholders are high, insider trading restrictions are associated with greater earnings opacity.

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Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number 2004-695.

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Length: 37 pages
Date of creation: 01 May 2004
Date of revision:
Handle: RePEc:wdi:papers:2004-695

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Find related papers by JEL classification:
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-03-20 (All new papers)
NEP-BEC-2005-03-20 (Business Economics)
NEP-FIN-2005-03-20 (Finance)
NEP-FMK-2005-03-20 (Financial Markets)
NEP-REG-2005-03-20 (Regulation)
NEP-SEA-2005-03-20 (South East Asia)
NEP-TRA-2005-03-20 (Transition Economics)

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