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The Unanticipated Effects of Insider Trading Regulation

Artyom Durnev () and Amrita S. Nain ()

William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: Using a sample of 2,827 firms from 21 countries we examine whether insider trading laws achieve the primary objective for which they are introduced – protecting uninformed investors from private information-based trading. We find that when control is concentrated in the hands of a large shareholder, insider trading regulation is less effective in reducing private information-based trading if investor protection is poor. We suggest that controlling shareholders who are banned from trading may resort to covert expropriation of firm resources, creating more information asymmetry and thereby encouraging private information trading by informed outsiders. Consistent with this, we find evidence that when the rights of controlling shareholders are high, insider trading restrictions are associated with greater earnings opacity.

Keywords: Insider Trading Regulation; Ownership; Private Information Trading; Earnings Opacity (search for similar items in EconPapers)
JEL-codes: G14 G15 G38 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2004-05-01
New Economics Papers: this item is included in nep-bec, nep-fin, nep-fmk, nep-reg, nep-sea and nep-tra
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