Insiders and the Law: The Impact of Regulatory Change On Insider Trading

Zusammenfassung

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Despite the importance of insider trading laws in promoting a strong financial market, the impact of regulations in minimizing the detrimental effects of insider trading is unsettled. This paper adds to the literature by examining the impact of the introduction of the Securities Market Amendment Act 2002 in New Zealand on several aspects of the market, namely bid-ask spreads, liquidity, price volatility and the cost of capital. The paper finds strong evidence of predicted reductions in the cost of capital, bid-ask spreads and volatility accompanied by increases in liquidity. It concludes that the change in regulations has had a positive impact on the market.

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Auszug

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Insiders and the Law: The Impact of Regulatory Change On Insider Trading

Introduction

The literature on corporate governance has shown that the structure of laws within a country has a profound effect on the business environment. In particular, poor investor protection can lead to more concentrated share ownership and generate problems for businesses that seek external financing for worthy projects (La Porta et al. 1998). Given the importance of catering to the financing needs of companies and the huge benefits of a strong stock market to an economy in general, countries have had to examine all factors that reduce their appeal to savvy international investors. This has been especially important for areas that are not easily addressed by private contracting and/or enforcement between the company and its stakeholders (La Porta et al. 2000). One area in particular that has come under intense scrutiny over the previous decade and a half is insider trading regulation.

Insider trading profits come at the expense of other traders, resulting in investors either purchasing shares only at a discount or avoiding investing altogether (Manove 1989, Ausbel 1990). This lack of confidence in the integrity of the market may not only reduce the liquidity, but also slow down the pace of share offerings, affect the efficiency of resource allocation and raise the cost of capital for companies, thereby reducing their value (La Porta et al. 2000, Bhattacharya/Daouk 2002). Consequently, businesses may find themselves at a disadvantage to competitors in better regulated markets. In an effort to improve investors' protection a significant number of countries have enacted insider trading restrictions in recent ye...

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