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Insider Trading Restrictions and Analysts' Incentives to Follow Firms

Authors

  • ROBERT M. BUSHMAN,

    1. 1University of North Carolina Kenan-Flagler Business School
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  • JOSEPH D. PIOTROSKI,

    1. 2University of Chicago Graduate School of Business
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  • ABBIE J. SMITH

    1. 2University of Chicago Graduate School of Business
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    • We thank Jeff Abarbanell, Mark Lang, Darius Miller, Jake Thomas, Jerry Zimmerman, an anonymous referee, and workshop participants at University of Chicago, University of Colorado, Harvard Business School, University of Illinois (Chicago), University of Rochester, Stanford University, UCLA, and Yale University for helpful discussions, comments, and suggestions. We also appreciate the research assistance of Sara Eriksen and the financial support of Harvard Business School, Kenan-Flagler Business School, the William Ladany Faculty Research Fund, and the Institute of Professional Accounting of the GSB, University of Chicago.


ABSTRACT

Motivated by extant finance theory predicting that insider trading crowds out private information acquisition by outsiders, we use data for 100 countries for the years 1987–2000 to study whether analyst following in a country increases following restriction of insider trading activities. We document that analyst following increases after initial enforcement of insider trading laws. This increase is concentrated in emerging market countries, but is smaller if the country has previously liberalized its capital market. We also find that analyst following responds less intensely to initial enforcement when a country has a preexisting portfolio of strong investor protections.

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