Do Insider Trading Laws Work?
IMD International; European Corporate Governance Institute (ECGI); Yale University - International Center for Finance
EFA 2001 Barcelona Meetings; Yale ICF Working Paper No. 00-19; Yale SOM Working Paper No. ICF - 00-19
By calculating an estimated measure of undetected insider trading, this paper shows that profits made by informed corporate insiders prior to tender offer announcements increase after the first enforcement of insider trading laws. I analyze the effects of Insider Trading regulation on a sample of 5,099 acquisitions in 56 different countries, and estimate the profits due to insider trading from the abnormal volume in the weeks prior to the announcement, under the assumption that insiders purchase those shares at the prevailing price and hold them until the public announcement. I find that laws that prosecute insider trading fail to eliminate profits made by insiders, and make acquisitions more expensive. Therefore, by increasing the market reaction to an acquisition, insider trading laws make it profitable to violate them.
Number of Pages in PDF File: 47
Keywords: Insider trading, takeovers, market regulation
JEL Classification: G38, G34, G15
Date posted: November 15, 2000