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The impact of stringent insider trading laws and institutional quality on cost of capital

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  • Kwabi, Frank O.
  • Boateng, Agyenim
  • Adegbite, Emmanuel

Abstract

This paper examines the effects of interaction between stringent insider trading laws, institutional quality and equity portfolio allocation on the cost of capital. Using a dataset drawn from 44 countries over the period from 2001 to 2015, we find that stringent insider trading laws interact with institutional quality and foreign equity portfolio allocation to reduce the country-level cost of capital. Further analysis from a quasi-natural experiment based on the 2008–2009 global financial crisis suggests that the findings are robust to endogeneity. Our results imply that the enactment of stringent insider trading laws and their interplay with the quality of institutions are not only important to portfolio investment allocation decisions but reduce the country-level cost of capital.

Suggested Citation

  • Kwabi, Frank O. & Boateng, Agyenim & Adegbite, Emmanuel, 2018. "The impact of stringent insider trading laws and institutional quality on cost of capital," International Review of Financial Analysis, Elsevier, vol. 60(C), pages 127-137.
    • Handle: RePEc:eee:finana:v:60:y:2018:i:c:p:127-137
    DOI: 10.1016/j.irfa.2018.07.011
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    References listed on IDEAS

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    Cited by:

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    3. Bruce W. Klaw & Don Mayer, 2021. "Ethics, Markets, and the Legalization of Insider Trading," Journal of Business Ethics, Springer, vol. 168(1), pages 55-70, January.

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    More about this item

    Keywords

    Insider trading laws; Cost of capital; Foreign equity allocation; Institutional quality;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • F3 - International Economics - - International Finance

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