345. Laura Nyantung Beny, Do Shareholders Value Insider Trading Laws? International Evidence, 12/2001; subsequently published in Journal of Law, Economics, & Policy, Vol. 4, 2007-2008, 267-310.
Abstract: The paper investigates the corporate valuation implications of insider trading legislation and enforcement. First, I present a simple agency model of insider trading and corporate valuation. Then, using standard measures of corporate valuation - Tobin's Q and the cash flow to price ratio - and controlling for the incidence of enforcement and firm-level sales growth, I estimate the value of insider trading law. The firm-level data used in this paper come from a variety of firms with diverse ownership and control structures from a cross-section of developed countries that exhibit a wide range of legal and institutional characteristics. I find that stricter insider trading laws and enforcement are unambiguously associated with greater corporate valuation among firms in which ownership and control are separated - i.e., widely held firms. This finding suggests that insider trading laws and enforcement might mitigate corporate agency costs in widely held firms, consistent with theoretical studies that characterize insider trading as an agency problem (e.g., Maug, 2000) and contradictory to those that characterize insider trading as an incentive-alignment device (e.g., Carlton and Fischel, 1983; Manne, 1966). The evidence is mixed for firms with a controlling shareholder. The results of ordinary least squares regressions suggest that, for the latter firms, insider trading legislation might impair corporate monitoring, consistent with Bhide (1993) and Demsetz (1986). However, the results of instrumental variables regressions - to address the potential endogeneity of ownership/valuation and insider trading laws - suggest that insider trading legislation is associated with greater corporate valuation among firms with controlling owners as well. The paper is an important addition to both the law and economics debate about insider trading and the empirical law and finance literature.