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Do Investors In Controlled Firms Value Insider Trading Laws? International Evidence, Laura N. Beny

Law & Economics Working Papers Archive: 2003-2009

This article characterizes insider trading in controlled firms as an agency problem. Using a standard agency model of corporate value diversion through insider trading by a controlling shareholder, I derive testable hypotheses about the relationship between corporate value and insider trading laws. The article tests these hypotheses using cross-sectional data on firms from a group of developed countries. The results show that stringent insider trading laws and enforcement are associated with greater corporate valuation among firms in common law countries, a result that is consistent with the claim that insider trading laws can mitigate agency costs. In contrast, insider trading …