IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Do Investors Value Insider Trading Laws? International Evidence

  • Laura Beny

    ()

Registered author(s):

    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.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://deepblue.lib.umich.edu/bitstream/2027.42/57217/1/wp837.pdf
    Download Restriction: no

    Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp837.

    as
    in new window

    Length: pages
    Date of creation: 01 Aug 2006
    Date of revision:
    Handle: RePEc:wdi:papers:2006-837
    Contact details of provider: Postal:
    724 E. University Ave, Wyly Hall 1st Flr, Ann Arbor MI 48109

    Phone: 734 763-5020
    Fax: 734 763-5850
    Web page: http://www.wdi.umich.edu
    Email:


    More information through EDIRC

    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.:

    as in new window
    1. 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.
    2. Rafael La Porta & Florencio Lopez-deSilanes & Andrei Shleifer & Robert W. Vishny, 1999. "Investor Protection and Corporate Valuation," NBER Working Papers 7403, National Bureau of Economic Research, Inc.
    3. Leland, Hayne E, 1992. "Insider Trading: Should It Be Prohibited?," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 859-87, August.
    4. Julan Du & Shang-Jin Wei, 2003. "Does Insider Trading Raise Market Volatility?," NBER Working Papers 9541, National Bureau of Economic Research, Inc.
    5. Harris, Milton & Raviv, Artur, 1988. "Corporate governance : Voting rights and majority rules," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 203-235, January.
    6. Bebchuk, Lucian Arye & Fershtman, Chaim, 1994. "Insider Trading and the Managerial Choice among Risky Projects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(01), pages 1-14, March.
    7. Noe, Thomas H, 1997. "Insider Trading and the Problem of Corporate Agency," Journal of Law, Economics and Organization, Oxford University Press, vol. 13(2), pages 287-318, October.
    8. Shleifer, Andrei & Vishny, Robert W., 1986. "Large Shareholders and Corporate Control," Scholarly Articles 3606237, Harvard University Department of Economics.
    9. Dye, Ronald A, 1984. "Inside Trading and Incentives," The Journal of Business, University of Chicago Press, vol. 57(3), pages 295-313, July.
    10. Lucian Bebchuk & Reinier Kraakman & George Triantis, 1999. "Stock Pyramids, Cross-Ownership, and the Dual Class Equity: The Creation and Agency Costs of Seperating Control from Cash Flow Rights," NBER Working Papers 6951, National Bureau of Economic Research, Inc.
    11. Simeon Djankov & Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2005. "The Law and Economics of Self-Dealing," NBER Working Papers 11883, National Bureau of Economic Research, Inc.
    12. Stephen R. Foerster & G. Andrew Karolyi, 1999. "The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States," Journal of Finance, American Finance Association, vol. 54(3), pages 981-1013, 06.
    13. Demsetz, Harold & Villalonga, Belen, 2001. "Ownership structure and corporate performance," Journal of Corporate Finance, Elsevier, vol. 7(3), pages 209-233, September.
    14. Julio Pindado & Chabela De La Torre, 2004. "Why is ownership endogenous?," Applied Economics Letters, Taylor & Francis Journals, vol. 11(14), pages 901-904.
    15. Mike Burkart & Denis Gromb & Fausto Panunzi, 1998. "Why Higher Takeover Premia Protect Minority Shareholders," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 172-204, February.
    16. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation," Scholarly Articles 29407535, Harvard University Department of Economics.
    17. Masson, Robert T & Madhavan, Ananth, 1991. "Insider Trading and the Value of the Firm," Journal of Industrial Economics, Wiley Blackwell, vol. 39(4), pages 333-53, June.
    18. Art A. Durnev & Amrita S. Nain, 2007. "The Effectiveness of Insider Trading Regulation: International Evidence," CESifo DICE Report, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 5(1), pages 10-15, 05.
    19. Laura Nyantung Beny, 2005. "Do Insider Trading Laws Matter? Some Preliminary Comparative Evidence," American Law and Economics Review, Oxford University Press, vol. 7(1), pages 144-183.
    20. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    21. Shin, Jhinyoung, 1996. "The Optimal Regulation of Insider Trading," Journal of Financial Intermediation, Elsevier, vol. 5(1), pages 49-73, January.
    22. Demsetz, Harold, 1986. "Corporate Control, Insider Trading, and Rates of Return," American Economic Review, American Economic Association, vol. 76(2), pages 313-16, May.
    23. Maug, Ernst, 2002. "Insider trading legislation and corporate governance," European Economic Review, Elsevier, vol. 46(9), pages 1569-1597, October.
    24. Randall Morck & David Stangeland & Bernard Yeung, 2000. "Inherited Wealth, Corporate Control, and Economic Growth The Canadian Disease?," NBER Chapters, in: Concentrated Corporate Ownership, pages 319-372 National Bureau of Economic Research, Inc.
    25. Bhide, Amar, 1993. "The hidden costs of stock market liquidity," Journal of Financial Economics, Elsevier, vol. 34(1), pages 31-51, August.
    26. Nenova, Tatiana, 2003. "The value of corporate voting rights and control: A cross-country analysis," Journal of Financial Economics, Elsevier, vol. 68(3), pages 325-351, June.
    27. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    28. Michael Manove, 1989. "The Harm from Insider Trading and Informed Speculation," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 823-845.
    29. Venkat Eleswarapu & Chandrasekar Krishnamurti, 1995. "Liquidity, stock returns and ownership structure: an empirical study of the BSE," Finance 9507005, EconWPA.
    30. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
    31. Edward Glaeser & Simon Johnson & Andrei Shleifer, 2001. "Coase Versus the Coasians," The Quarterly Journal of Economics, Oxford University Press, vol. 116(3), pages 853-899.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:wdi:papers:2006-837. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Laurie Gendron)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.