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The Unanticipated Effects of Insider Trading Regulation

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  • 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.

Suggested Citation

  • Art A. Durnev & Amrita S. Nain, 2004. "The Unanticipated Effects of Insider Trading Regulation," William Davidson Institute Working Papers Series 2004-695, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:2004-695
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    More about this item

    Keywords

    Insider Trading Regulation; Ownership; Private Information Trading; Earnings Opacity;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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