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).
Beny, Laura N. "Do Investors in Controlled Firms Value Insider Trading Laws? International Evidence." J. L. Econ. & Pol'y 4, no. 2 (2008): 267-310.