Do Criminal Sanctions Deter Insider Trading?

28 Pages Posted: 5 Apr 2013

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: May 2013

Abstract

Many developed markets have taken what appears to be a tough stance on illegal insider trading through the use of criminal sanctions. Although criminal sanctions represent a much greater penalty than civil sanctions, the higher burden of proof required makes their enforceability weaker. This trade off between severity and enforceability makes the impact of criminal sanctions ambiguous. We empirically examine this issue by studying the deterrence of insider trading following the introduction of criminal sanctions in a developed market. Significant changes in sanction regimes are rare, especially when criminal sanctions are introduced without other changes. In February 2008, New Zealand introduced criminal sanctions for insider trading. This change of law offers a unique setting in which to examine the deterrence effect of criminalization. Using measures for the cost of trading, degree of information asymmetry, and probability of informed trading, we find that the enactment of this law led to a worsening in these measures. These findings suggest that the weaker enforceability of criminalization outweighs the associated increased severity of the penalties in New Zealand.

Keywords: market microstructure, bid‐ask spreads, information asymmetry, insider trading, criminal sanctions

JEL Classification: C22, D82, G18

Suggested Citation

Frijns, Bart and Gilbert, Aaron B. and Tourani-Rad, Alireza, Do Criminal Sanctions Deter Insider Trading? (May 2013). Financial Review, Vol. 48, Issue 2, pp. 205-232, 2013. Available at SSRN: https://ssrn.com/abstract=2245395 or http://dx.doi.org/10.1111/fire.12001

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

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

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

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