The article presents a simple agency model of the relationship between corporate valuation and insider trading laws. The article then investigates the model’s three testable hypotheses using firm-level data from a cross-section of developed countries. I find that more stringent insider trading laws and enforcement are associated with greater corporate valuation among the sample firms in common countries, while they are generally irrelevant to corporate valuation for the sample firms in civil law countries. This puzzling dichotomy is robust to various alternative specifications and to controlling for a wide range of potentially omitted variables. The result for the firms in common law countries is consistent with the claim that insider trading laws can help to reduce corporate agency costs. I also find that insider trading laws and cash flow ownership appear to be complementary means to reduce agency costs, contrary to my hypothesis that they are substitute mechanisms for controlling agency costs; however, this result is generally statistically insignificant. Finally, I confirm prior findings of an “incentive effect” of greater cash flow ownership by controlling shareholders.
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Length: pages Date of creation: 01 Aug 2006 Date of revision: Handle: RePEc:wdi:papers:2006-837
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Find related papers by JEL classification: G30 - Financial Economics - - Corporate Finance and Governance - - - General G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation K22 - Law and Economics - - Regulation and Business Law - - - Corporation and Securities Law
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Rafael La porta & Florencio Lopez-De-Silanes & Andrei Shleifer & Robert Vishny, 2002.
"Investor Protection and Corporate Valuation,"
Journal of Finance,
American Finance Association, vol. 57(3), pages 1147-1170, 06.
[Downloadable!] (restricted)
Other versions:
Rafael Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2006.
"What Works in Securities Laws?,"
Journal of Finance,
American Finance Association, vol. 61(1), pages 1-32, 02.
[Downloadable!] (restricted)
Other versions:
Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer, 2003.
"What Works in Securities Law?,"
NBER Working Papers
9882, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)