Do Investors in Controlled Firms Value Insider Trading Laws? International Evidence
Laura Nyantung Beny
University of Michigan Law School
Journal of Law, Economics and Policy, Vol. 4, No. 2, 267, 2008
U of Michigan Law & Economics, Olin Working Paper No. 06-003
William Davidson Institute Working Paper No. 837
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.
Number of Pages in PDF File: 45
Keywords: corporate valuation, insider trading, insider trading laws and enforcement, agency costs, private benefits, law and finance
JEL Classification: G30, G38, K22
Date posted: April 7, 2003 ; Last revised: June 15, 2008
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