Insider Trading Regulation and Market Quality: Evidence from American Depositary Receipts

Authors

  • Kee H. Chung,

    Corresponding author
    1. Department of Finance and Managerial Economics, State University of New York at Buffalo
      Corresponding author: Kee H. Chung, Department of Finance and Managerial Economics, School of Management, State University of New York (SUNY) at Buffalo, Buffalo, NY 14260, USA. Tel: +1 716 645 3262, Fax: +1 716 645 3823, email: keechung@buffalo.edu.
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  • Hao Zhang

    1. E. Philip Saunders College of Business, Rochester Institute of Technology
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Corresponding author: Kee H. Chung, Department of Finance and Managerial Economics, School of Management, State University of New York (SUNY) at Buffalo, Buffalo, NY 14260, USA. Tel: +1 716 645 3262, Fax: +1 716 645 3823, email: keechung@buffalo.edu.

Abstract

We investigate the relation between insider trading law enforcement and stock market quality using a sample of American Depositary Receipts (ADR) over the period from 1998 to 2006. We show that ADR from countries that have enforced insider trading laws have better market liquidity and lower information asymmetry than ADR from countries that have not enforced insider trading laws. In addition, ADR from countries with insider trading law enforcement have greater price efficiency. Our results are robust to different estimation methods and alternative model specifications. We interpret these results as evidence that the enforcement of insider trading laws can effectively deter insider trading and enhance both market liquidity and price efficiency.

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