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Do Investors Value Insider Trading Laws? International Evidence (2006)
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BibTeX
@MISC{Davidson06doinvestors,
author = {The William Davidson and Laura Beny},
title = {Do Investors Value Insider Trading Laws? International Evidence},
year = {2006}
}
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Abstract
The article presents a simple agency model of the relationship between corporate valuation and insider trading laws. The article then investigates the model’s three testable hypotheses using firm-level data from a cross-section of developed countries. I find that more stringent insider trading laws and enforcement are associated with greater corporate valuation among the sample firms in common countries, while they are generally irrelevant to corporate valuation for the sample firms in civil law countries. This puzzling dichotomy is robust to various alternative specifications and to controlling for a wide range of potentially omitted variables. The result for the firms in common law countries is consistent with the claim that insider trading laws can help to reduce corporate agency costs. I also find that insider trading laws and cash flow ownership appear to be complementary means to reduce agency costs, contrary to my hypothesis that they are substitute mechanisms for controlling agency costs; however, this result is generally statistically insignificant. Finally, I confirm prior findings of an “incentive
Keyphrases
corporate valuation international evidence investor value insider trading law insider trading law agency cost sample firm corporate agency cost common country testable hypothesis various alternative specification stringent insider trading law common law country simple agency model complementary mean wide range prior finding cash flow ownership civil law country developed country firm-level data substitute mechanism
