The Real Effect of the Initial Enforcement of Insider Trading Laws

52 Pages Posted: 22 Jul 2014 Last revised: 14 Nov 2017

See all articles by Zhihong Chen

Zhihong Chen

Hong Kong University of Science and Technology

Yuan Huang

Hong Kong Polytechnic University - School of Accounting and Finance

Yuanto Kusnadi

Singapore Management University - School of Accountancy

K.C. John Wei

Hong Kong Polytechnic University

Date Written: December 21, 2016

Abstract

Based on a difference-in-differences approach, we find strong evidence that the initial enforcement of insider trading laws improves capital allocation efficiency. The effect is concentrated in developed markets and manifests shortly after the enforcement year. Cross-sectional analyses show that the improvement in capital allocation efficiency is more pronounced in countries with more opaque information environment before the enforcement year. Furthermore, the improvement is more pronounced for more financially constrained firms and firms with severer agency problems. Finally, we find increased accounting performance after the enforcement and the increase is positively associated with the improvement in capital allocation efficiency. Overall, our evidence suggests that the initial enforcement of insider trading laws improves capital allocation efficiency by increasing transparency and reducing market frictions arising from information asymmetry and agency problems.

Keywords: Enforcement; Insider trading laws; Capital allocation efficiency; Investment; Transparency; Market frictions

JEL Classification: D83, G15, G31, K22

Suggested Citation

Chen, Zhihong and Huang, Yuan and Kusnadi, Yuanto and Wei, Kuo-Chiang (John), The Real Effect of the Initial Enforcement of Insider Trading Laws (December 21, 2016). Singapore Management University School of Accountancy Research Paper No. 2017-69, Available at SSRN: https://ssrn.com/abstract=2469068 or http://dx.doi.org/10.2139/ssrn.2469068

Zhihong Chen

Hong Kong University of Science and Technology ( email )

Clear Water Bay
Kowloon
Hong Kong
Hong Kong
(852)-2358-7574 (Phone)
(852)-2358-1693 (Fax)

Yuan Huang

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Yuanto Kusnadi

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore
+65 6808 5449 (Phone)

Kuo-Chiang (John) Wei (Contact Author)

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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