The effectiveness of tightening illegal insider trading regulation: the case of corporate takeovers

Anthony Boardman, Z. Stuart Liu, Marshall Sarnat and Ilan Vertinsky

Applied Financial Economics, 1998, vol. 8, issue 5, 519-531

Abstract: The impact of tightening the regulation of illegal insider trading in the United States is analysed. It is argued that more effective regulation will reduce the price run-up in target companies prior to takeover announcements. By comparing stock price responses to takeover announcements during two distinct regulatory regimes - a regime of lax regulation, prior to 1985, and a regime of stricter regulation, 1989-1991 - inferences are made about the effectiveness of changes in illegal insider trading regulation. Using this approach, strong evidence is found that stricter regulation was effective in reducing illegal insider trading. Tightening the regulation had a greater impact on negotiated takeovers than on those initiated by bidding. Evidence also indicates that, for negotiated takeovers, but not for takeovers initiated by bidding, insiders associated with acquiring firms sought fewer but more profitable takeovers after the effective tightening of regulation, possibly to compensate them for the reduction in the profit opportunities from illegal insider trading.

Date: 1998
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DOI: 10.1080/096031098332826

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