The real effect of the initial enforcement of insider trading laws

Zhihong Chen, Yuan Huang, Yuanto Kusnadi, K. C.J. Wei

Research output: Journal article publicationJournal articleAcademic researchpeer-review

12 Citations (Scopus)

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. Further analysis shows that the improvement is positively associated with the increase in liquidity around the enforcement year and the opaqueness of the information environment before the enforcement year. The improvement is more pronounced for firms operating in more competitive markets, being more financially constrained, and with more severe 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 providing more information to guide managerial decisions and by reducing market frictions arising from information asymmetry and agency problems.
Original languageEnglish
Pages (from-to)687-709
Number of pages23
JournalJournal of Corporate Finance
Volume45
DOIs
Publication statusPublished - 1 Aug 2017

Keywords

  • Capital allocation
  • Enforcement
  • Insider trading laws
  • Investment
  • Managerial learning
  • Market frictions
  • Real effect

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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