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The effectiveness of tightening illegal insider trading regulation: the case of corporate takeovers

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  • Anthony Boardman
  • Z. Stuart Liu
  • Marshall Sarnat
  • Ilan Vertinsky

Abstract

The impact of tightening the regulation of illegal insider trading in the United States is analysed. It is argued that more effective regulation will reduce the price run-up in target companies prior to takeover announcements. By comparing stock price responses to takeover announcements during two distinct regulatory regimes - a regime of lax regulation, prior to 1985, and a regime of stricter regulation, 1989-1991 - inferences are made about the effectiveness of changes in illegal insider trading regulation. Using this approach, strong evidence is found that stricter regulation was effective in reducing illegal insider trading. Tightening the regulation had a greater impact on negotiated takeovers than on those initiated by bidding. Evidence also indicates that, for negotiated takeovers, but not for takeovers initiated by bidding, insiders associated with acquiring firms sought fewer but more profitable takeovers after the effective tightening of regulation, possibly to compensate them for the reduction in the profit opportunities from illegal insider trading.

Suggested Citation

  • Anthony Boardman & Z. Stuart Liu & Marshall Sarnat & Ilan Vertinsky, 1998. "The effectiveness of tightening illegal insider trading regulation: the case of corporate takeovers," Applied Financial Economics, Taylor & Francis Journals, vol. 8(5), pages 519-531.
    • Handle: RePEc:taf:apfiec:v:8:y:1998:i:5:p:519-531
    DOI: 10.1080/096031098332826
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    References listed on IDEAS

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    2. Luke M. Bennett & Wei Hu, 2023. "Filtration enlargement‐based time series forecast in view of insider trading," Journal of Economic Surveys, Wiley Blackwell, vol. 37(1), pages 112-140, February.

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