Insider Trading Laws and Stock Price

We investigate the relation between a country’s first-time enforcement of insider trading laws and stock price informativeness using data from 48 countries over 1980–2003. Enforce-ment of insider trading laws improves price informativeness, as measured by firm-specific stock return variation, but this increase is concentrated in developed markets. In emerging market countries, price informativeness changes insignificantly after the enforcement, as the important contribution of insiders in impounding information into stock prices largely disappears. The enforcement does not achieve the goal of improving price informativeness in countries with poor legal institutions. It does turn some private information into public information, thereby reducing the cost of equity in emerging markets. (JEL G14, G38) The costs and benefits of insider trading and the need for regulation are an ongoing question in the finance literature. One view is that insider trading makes an important contribution with regard to the timely and accurate incorporation of information into stock prices. That is, insider trading contributes to more informative stock prices, in that prices actually reflect the firm’s true value (Manne, 1966; Carlton and Fischel, 1983)