The real effect of the initial enforcement of insider trading laws

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 improv...

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Bibliographic Details
Published inJournal of corporate finance (Amsterdam, Netherlands) Vol. 45; pp. 687 - 709
Main Authors Chen, Zhihong, Huang, Yuan, Kusnadi, Yuanto, John Wei, K.C.
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.08.2017
Subjects
Capital allocation
Enforcement
Insider trading laws
Investment
Managerial learning
Market frictions
Real effect
Enforcement
Insider trading laws
Capital allocation
G31
Real effect
Market frictions
G15
K22
Managerial learning
D83
Investment
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Summary: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. •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.•Accounting performance improvement after enforcement is positively associated with capital allocation efficiency improvement.•The enforcement improves capital allocation efficiency by increasing price informativeness and reducing market frictions.
ISSN:0929-1199
1872-6313
DOI:10.1016/j.jcorpfin.2017.06.006