Do Criminal Sanctions Deter Insider Trading?

37 Pages Posted: 15 Mar 2011

See all articles by Bart Frijns

Bart Frijns

Auckland University of Technology - Faculty of Business & Law

Aaron B. Gilbert

Auckland University of Technology - Faculty of Business & Law

Alireza Tourani-Rad

Auckland University of Technology - Faculty of Business & Law

Multiple version iconThere are 2 versions of this paper

Date Written: March 14, 2011

Abstract

Many countries have adopted criminal sanctions as a way to deter insider trading. Although criminal sanctions represent a much greater penalty than civil sanctions, the enforceability of criminal sanctions is weaker given the higher burden of proof required. This trade-off between severity and enforceability implies that the impact of introducing criminal sanction is not unambiguous. In this paper we examine the impact of the introduction of criminal sanctions in New Zealand, where criminal sanctions (at the expense of civil sanctions) were enacted in February 2008. Using measures for the cost of trading, degree of information asymmetry, and probability of informed trading, we find that the enactment of this law has led to a deterioration in the market, indicating that the weaker enforceability outweighs the increased severity of the penalties.

Keywords: Insider Trading, Criminal Sanctions, Bid-Ask Spreads, Information Asymmetry Costs

JEL Classification: C22, D82, G18

Suggested Citation

Frijns, Bart and Gilbert, Aaron B. and Tourani-Rad, Alireza, Do Criminal Sanctions Deter Insider Trading? (March 14, 2011). Available at SSRN: https://ssrn.com/abstract=1785873 or http://dx.doi.org/10.2139/ssrn.1785873

Bart Frijns

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Aaron B. Gilbert

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Alireza Tourani-Rad (Contact Author)

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

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