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Abstract: The primary goal of this Article is to bring empirical evidence to bear on the heretofore largely theoretical law and economics debate about insider trading. The Article first summarizes various agency, market, and contractual (or "Coasian") theories of insider trading propounded over the course of this longstanding debate. The Article then proposes three testable hypotheses regarding the relationship between insider trading laws and several measures of stock market performance. Exploiting the natural variation of international data, the Article finds that more stringent insider trading laws are generally associated with more dispersed equity ownership, greater stock price accuracy and greater stock market liquidity, controlling for various economic, legal and institutional factors. These results cast doubt on pure "Coasian" theories of insider trading and suggest the appropriate locus of academic and policy inquiries about the efficiency implications of insider trading and its regulation. Further empirical research is necessary, however, in order conclusively to resolve the perennial insider trading debate.
insider trading, agency costs, market efficiency, stock markets, law and finance
Abstract: This article characterizes insider trading in controlled firms as an agency problem. Using a standard agency model of corporate value diversion through insider trading by a controlling shareholder, I derive testable hypotheses about the relationship between corporate value and insider trading laws. The article tests these hypotheses using cross-sectional data on firms from a group of developed countries. The results show that stringent insider trading laws and enforcement are associated with greater corporate valuation among firms in common law countries, a result that is consistent with the claim that insider trading laws can mitigate agency costs. In contrast, insider trading laws and enforcement are generally insignificant to corporate valuation among firms in civil law countries. These results are robust to alternative regression specifications and to controlling for a variety of relevant factors and they suggest that the firm-level impact of insider trading regulation may depend on the local context in which it is applied.
corporate valuation, insider trading, insider trading laws and enforcement, agency costs, private benefits, law and finance
Abstract: This article investigates the determinants of insider trading regulation across countries. The article presents a political economy analysis of such regulation that takes into account both private (distributional) and public (economic efficiency) considerations. The model cannot be tested directly because the relevant private preferences and social costs are unobservable. However, existing theories of capital market development suggest that various observable social factors can explain the diversity of insider trading policies across countries. In turn, these social factors should reveal the underlying preferences and social costs motivating such regulation. The main finding, based on data from a cross section of countries between 1980 and 1999, is that a country's political system and not its legal or financial system provides the first-order explanation of its proclivity to regulate insider trading. Specifically, more democratic political systems enacted and enforced insider trading laws earlier than less democratic political systems, controlling for wealth, financial development, legal origin, and measures of latent social factors. In addition, left-leaning governments were relative latecomers to insider trading legislation and enforcement relative to right-leaning and centrist governments, controlling for the same factors as above. The findings are consistent with the political theory of capital market development and inconsistent with the legal origins theory of capital market development. They also challenge theoretical claims that insider trading restrictions are market-inhibiting because the kinds of governments that appear more prone to regulate insider trading are precisely the governments that are generally thought to pursue market-promoting policies.
insider trading regulation, political economy, law and finance, political theory of finance
Abstract: Despite the longstanding insider trading debate, there is little empirical research on insider trading laws, especially in a comparative context. The article attempts to fill that gap. I find that countries with more prohibitive insider trading laws have more diffuse equity ownership, more accurate stock prices, and more liquid stock markets. These findings are generally robust to controlling for measures of disclosure and enforceability and suggest that formal insider trading laws (especially their deterrent components) matter to stock market development. The article suggests further avenues of empirical research on the specific mechanisms through which insider trading laws might matter and the political economy of their adoption.
Insider trading law, Market efficiency, Ownership structure, Law and finance, Comparative capital markets
insider trading law, law and finance, comparative evidence
Abstract: U.S. stocks trade on an increasing number of structurally diverse and competitive stock markets. However, there is concern about the type of competition that has emerged and its implications for investor protection and market efficiency. For instance, the increasing challenge posed to the principal stock exchanges (like the NYSE) by alternative markets raises concerns about excessive order flow fragmentation and its implications for stock price efficiency and liquidity. The controversial practice of payment for order flow (POF), whereby dealers pay brokers to route customers' orders to them whether or not such routing results in the best price for the customer, also causes concern because it significantly reduces investors' choice over where their trades will occur. The paper considers these and other contemporary issues (like market transparency and collusion in dealer markets) in considerable detail. It also provides a useful survey of the financial economics literature on these topics. The paper argues that the current regulatory framework (the National Market System) inadequately addresses the above concerns. In light of technological and regulatory changes over the past two decades, the theoretical framework upon which the present regulatory system is based is no longer appropriate. In particular, recent developments cast doubt on the view that the primary exchanges are natural monopolies. Therefore, I propose a fundamentally different approach to the regulation of U.S. secondary trading markets: a genuinely competitive regime that gives issuers and, derivatively, investors a genuine choice over where their shares will trade.
Market microstructure, payment for order flow, market transparency, National Market System
Abstract: This Article* considers the diversity-performance nexus among elite American law firms. I present several existing theories that might explain this nexus. I argue that these theories do not entirely explain certain institutional and behavioral realities among these law firms with respect to workplace diversity. The Article thus supplements the existing theories with a deliberately parsimonious theory that seems more consistent with several of the observed institutional and behavioral regularities among elite U.S. law firms. In particular, I argue that diversity functions as a signal for elite law firms. Adhering to diversity signals unobservable law firm attributes to various third parties, including prospective associates, and is thus a partial solution to asymmetric information. In this limited way, at least, diversity is "good for business". Ultimately, however, the theoretical model that I present is deficient in that it treats diversity as an exogenous norm. A deeper inquiry into the motives of elite law firms' diversity commitment is therefore in order. (*Note: This Article lays the preliminary theoretical foundation for the larger project, which will include an empirical analysis of the relationship between diversity and performance/quality/prestige among elite U.S. law firms. The next stage will include a refinement of the theoretical framework and an empirical analysis using data from the Law Firms Working Group)
Diversity, discrimination, law firms, social norms, neoclassical theory of employment discrimination
Abstract: Like U.S. firms, many Canadian firms voluntarily restrict trading by corporate insiders beyond the requirements of insider trading law. We aim to understand the determinants of firms' private insider trading policies (ITPs), which are quasi-contractual devices. Based on the assumption that firms that face greater costs from insider trading (or greater benefits from restricting insider trading) ought to be more inclined than other firms to adopt ITPs or to adopt more stringent ITPs than other firms, we develop five hypotheses. Specifically, we hypothesize that both ITP existence and ITP stringency are positively associated with a firm's size, market-to-book ratio, ownership and control concentration, firm-specific stock return volatility, and cross-listing in the U.S., where insider trading enforcement is more vigorous than in Canada. We test our hypotheses using data from a sample of firms included in the Toronto Stock Exchange/Standard and Poor's (TSX/S&P) Index. Our results, which are robust to selection effects, support all but one of our hypotheses. They suggest that Canadian firms do not randomly restrict insider trading, but rather do so predictably and with a predictable level of intensity. They also suggest that neither window dressing, liability avoidance, nor U.S. regulatory imperialism fully explains Canadian firms' adoption of ITPs. Rather, our results suggest that at least some firms and shareholders wish to control insider trading to enhance economic efficiency. On balance, our findings suggest that some firms perceive insider trading to be harmful to their interests and thus challenge the claim that private restrictions of insider trading would not arise in the absence of insider trading laws. Many Canadian firms privately restrict insider trading even though they face little threat of insider trading liability. Finally, our results suggest that formal organizational rules may dominate private sanctions in this context, consistent with norms/trust theories of organizational rules rather than economic deterrence theories of such rules.
insider trading, private regulation, public enforcement, securities laws, optional corporate rules, extra-territorial effect of U.S. laws
Abstract: This article seeks to explain Africa's current "period of unparalleled economic success," following decades of economic stagnation. Using newly available data, we investigate whether international commodity price increases (our "metals" hypothesis) or policy reforms (our "management" hypothesis) have driven Africa's recent reversal of economic fortune. Using cross-country growth analysis, we find that both "metals" and "management" have played a role. Because commodity booms are typically followed by commodity busts, better economic management may be critical for sustaining Africa's economic gains, particularly in the face of the present global economic crisis. We thus invite a reexamination of our "management" and "metals" hypotheses after a few years, when new data are available and the crisis has evolved.
Africa, economic growth, economic policy reform, commodities trade, Dutch disease, cross country growth
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