6-3
(A90)
The Real Effect of the Initial Enforcement of Insider Trading Laws
Zhihong Chen
City University of Hong Kong, Hong Kong
Yuan Huang
Hong Kong Polytechnic University, Hong Kong
Yuanto Kusnadi
City University of Hong Kong, Hong Kong
K. C. John Wei
Hong Kong University of Science and Technology, Hong Kong
We find strong evidence that the
enforcement of insider trading laws have a real effect on the economy. In
particular, the sensitivity of corporate investment to stock prices increases
significantly after the initial enforcement of insider trading laws using data
from 45 countries over 1982-2003. Further analysis suggests that the main reason
underlying this increase is that after the enforcement stock prices provide more
information to guide managers’ investment decisions. Finally, we find that the
improvement in firm operating performance after the enforcement is positively
associated with the increase in the investment-to-price sensitivity. Overall,
our results tend to support the managerial learning hypothesis.