Document Type

Article

Publication Date

2008

Abstract

This article characterizes insider trading as an agency problem in firms that have a controlling shareholder. Using a standard agency model of corporate value diversion through insider trading by the controlling shareholder, I derive testable hypotheses about the relationship between corporate value and insider trading laws among such firms. The article tests these hypotheses using firm-level cross-sectional data from twenty-seven developed countries. The results show that stringent insider trading laws and enforcement are associated with greater corporate valuation among the sample firms in common law countries, a result that is consistent with the claim that insider trading laws mitigate agency costs. In contrast, I find that insider trading laws and enforcement are generally insignificant to corporate value among the sample firms in civil law countries. I find no support, however, for the claim that insider trading laws exacerbate agency costs and thus no support for the deregulatory position. These results are robust to controlling for a variety of potentially relevant factors and suggest that the firm-level impact of insider trading regulation may depend on the local context in which it is applied (or not applied, as the case may be).

Download


Share

COinS