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The Unanticipated Effects of Insider Trading Regulation

  • Art Durnev

    (University of Miami)

  • Amrita Nain

    (University of Michigan)

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 American Law & Economics Association in its series American Law & Economics Association Annual Meetings with number 1023.

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Handle: RePEc:bep:alecam:1023
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