Do Investors Value Insider Trading Laws? International Evidence
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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