Extract

Despite theoretical arguments that stock markets are more efficient when insiders are allowed to trade freely, many increasingly regard insider trading as a threat to stock market integrity and efficiency. By 2000, eighty-seven countries had enacted insider trading legislation and thirty-eight had prosecuted insider trading at least once. However, these laws vary in stringency and many of them were enacted only recently, often long after the stock market came into existence. Enforcement intensity also varies across countries, with some countries regularly enforcing insider trading laws and others allowing insiders to trade with impunity notwithstanding the laws on the books. This study aims to provide at least a partial explanation of the differential timing of insider trading legislation and enforcement across countries. The results may inform the academic debate about insider trading regulation, which centers on the question of whether such regulation is efficient or inefficient. There are vocal advocates on both sides of the debate. Those who oppose insider trading regulation argue that, at best, it simply redistributes rents among private parties at the cost of regulation and, at worst, may reduce efficiency by distorting managerial incentives or reducing the accuracy of stock prices.