INSIDER TRADING, REGULATION, AND THE COMPONENTS OF THE BID-ASK SPREAD

In this article we investigate the relation between insider trading regulations and the bid-ask spread. We decompose the spread into its components before and after the enactment of strict new insider trading rules in New Zealand. We find that the enactment led to a significant decrease in the information asymmetry component of the spread, which is observed mainly in illiquid and high prechange information asymmetry companies. These findings are robust to model specification. In addition, we find a decrease in the contribution of information asymmetry to price volatility. (c) 2008 The Southern Finance Association and the Southwestern Finance Association.