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Insider Trading Restrictions and Insiders’ Supply of Information: Evidence from Reporting Quality

Ivy Zhang

University of Minnesota - Twin Cities

Yong Zhang

Hong Kong Polytechnic University

February 28, 2012

We exploit the natural experiment of first-time enforcement of insider trading laws to investigate the relationship between insider trading opportunities and insiders’ supply of information. We propose that insider trading opportunities curtail the informational efficiency of financial markets by motivating insiders to reduce financial reporting quality for the purpose of increasing their informational advantage over outsiders and extracting trading profits. Using data from 39 countries over the 1988-2004 period, we find that the quality of financial reporting increases significantly after the initial enforcement of insider trading laws in countries with a strong legal infrastructure. Further analyses show that the increase is concentrated in firms that are not closely held. In addition to uncovering a channel through which insider trading restrictions affect the information environment, our evidence also highlights the importance of country- and firm-level governance structures in determining the consequences of insider trading restrictions.

Number of Pages in PDF File: 55

Keywords: Insider Trading, Informational Efficiency, Reporting Quality, Legal Infrastructure

JEL Classification: G14, G18, M48

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Date posted: December 25, 2011 ; Last revised: May 15, 2012

Suggested Citation

Zhang, Ivy and Zhang, Yong, Insider Trading Restrictions and Insiders’ Supply of Information: Evidence from Reporting Quality (February 28, 2012). Available at SSRN: http://ssrn.com/abstract=1976555 or http://dx.doi.org/10.2139/ssrn.1976555

Contact Information

Ivy Zhang
University of Minnesota - Twin Cities ( email )
19th Avenue South
Minneapolis, MN 55455
United States
Yong Zhang (Contact Author)
Hong Kong Polytechnic University ( email )
Hung Hom
Hung Hom
Kowloon, AK HK HK
Hong Kong
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