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RFS Advance Access published online on July 23, 2008
Review of Financial Studies, doi:10.1093/rfs/hhn066
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© The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Insider Trading Laws and Stock Price Informativeness

Nuno Fernandes
Universidade Católica Portuguesa

Miguel A. Ferreira
ISCTE Business School-Lisbon

Address correspondence to Nuno Fernandes, Faculdade de Ciências Economicas e Empresariais, Palma de Cima, 1649-023 Lisboa, Portugal; telephone: +351.217.214.270; e-mail: nfernandes{at}fcee.ucp.pt.

JEL Classification: G14, G38


  Abstract

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. Enforcement 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.

The authors thank an anonymous referee, Matthew Spiegel (the editor), Utpal Bhattacharya, Jose Manuel Campa, and participants at the 2006 Western Finance Association and 2006 European Finance Association meetings for helpful comments.


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