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The real effect of the initial enforcement of insider trading laws

Author

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  • Chen, Zhihong
  • Huang, Yuan
  • Kusnadi, Yuanto
  • John Wei, K.C.

Abstract

Based on a difference-in-differences approach, we find strong evidence that the initial enforcement of insider trading laws improves capital allocation efficiency. The effect is concentrated in developed markets and manifests shortly after the enforcement year. Further analysis shows that the improvement is positively associated with the increase in liquidity around the enforcement year and the opaqueness of the information environment before the enforcement year. The improvement is more pronounced for firms operating in more competitive markets, being more financially constrained, and with more severe agency problems. Finally, we find increased accounting performance after the enforcement and the increase is positively associated with the improvement in capital allocation efficiency. Overall, our evidence suggests that the initial enforcement of insider trading laws improves capital allocation efficiency by providing more information to guide managerial decisions and by reducing market frictions arising from information asymmetry and agency problems.

Suggested Citation

  • Chen, Zhihong & Huang, Yuan & Kusnadi, Yuanto & John Wei, K.C., 2017. "The real effect of the initial enforcement of insider trading laws," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 687-709.
    • Handle: RePEc:eee:corfin:v:45:y:2017:i:c:p:687-709
    DOI: 10.1016/j.jcorpfin.2017.06.006
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    Cited by:

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    More about this item

    Keywords

    Enforcement; Insider trading laws; Capital allocation; Investment; Managerial learning; Market frictions; Real effect;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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