The Impact of the Securities Market Amendment Act 2002 on Insider Trading in New Zealand

Abstract

Insider trading has a number of harmful effects that can result in financial market distortions reducing its efficient functioning. Much of this harm comes from the large profits insiders expropriate from small investors and the resulting loss of confidence in the market by the investing community. This causes investors to reduce investment and participation in the market and imposes higher risk premiums and transaction costs on share prices to compensate for the added risk of trading against an insider. Studies have however shown that the regulatory regime of a country can impact on the degree of harm suffered by a market from the presence of insiders.However perceptions and commentaries on the laws governing insider trading in New Zealand over the past decade and a half have been generally dismissive. These views in no small part have been driven by the lack of successful enforcement since their introduction in 1988 despite a number of high profile situations that have reinforced the belief that insider trading is rife in the market. Etebari Tourani-Rad and Gilbert (2004) also showed that under the previous regime insider's trades earned profits that were significantly higher than both those of ordinary investors as well as insiders from more effectively regulated markets. To rectify this problem the Securities Market Amendment Act 2002 was enacted targeting the major weaknesses of the previous law. The new law now requires all corporate insiders executives directors and substantial shareholders to disclose details of their transactions within 5 working days and allows the Securities Commissions to prosecute an insider. These changes should reduce the amount of insider trading and therefore improve confidence in the New Zealand Stock Exchange. This paper examines the effect that these changes have had on the structure of the New Zealand market to see if the changes have been effective.