Elements of Effective Insider Trading Laws

Abstract

While countries have been more than willing to regulate insider trading it is an open question as to whether this has resulted in improvements for those markets. In particular lawmakers have had to largely structure the legal regimes with little guidance as to what makes an effective insider trading law. We seek to address this by examining the aspects of a legal regime that result in reductions in information trading and trading costs. Employing a sample of 18 countries we compare specific and quantifiable aspects of the legal regime with the measures of transactions costs in a sample of up to 70 randomly selected companies per market. We find that stronger laws result in reductions in the cost of informed trading. Particularly we find that broader laws laws that employ financial rather than criminal damages and laws that are enforced by strong public regulators perform best. These results should help to enlighten regulator attempts to create strong and effective insider trading laws