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Review of Quantitative Finance and Accounting
Published in: Review of Quantitative Finance and Accounting 3/2021

27-07-2020 | Original Research

The effect of insider trading laws and enforcement on stock market transaction cost

Authors: Frank O. Kwabi, Agyenim Boateng

Published in: Review of Quantitative Finance and Accounting | Issue 3/2021

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Abstract

Theoretical arguments suggest that as countries enact insider trading laws and complement them with enforcement, stock market information risk reduces and investor participation increases, and this will therefore have a negative effect on liquidity trading cost. Consistent with this expectation, based on panel data comprised of 32 countries for the period 2001–2015, we find that stringent insider trading laws and enforcement reduce stock market transaction cost. However, in countries where investor protection is poor, our results show that stringent insider trading laws have no effect on liquidity trading cost. We further find that stringent insider trading laws interact with institutional quality to reduce liquidity trading cost. Our findings are robust to difference-in-differences based on the 2008 global financial crises. The overall evidence implies that market participants will experience lower liquidity trading cost if insider trading laws are enforced.
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Appendix
Available only for authorised users
Footnotes
1
In this study we use stock market transaction cost and liquidity trading cost interchangeably.
 
2
Previous studies have provided theoretical arguments with regard to the link between stock market liquidity and cost of equity capital (Amihud and Mendelson 1986; Easley et al. 2002).
 
3
Our data begin from 2001 so we chose the year 2000 as the cut-off date.
 
4
The median value of the revised antidirector rights is 3.5 and therefore resulted in 15 (high investor protection) and 17 (low investor protection) countries.
 
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Metadata
Title
The effect of insider trading laws and enforcement on stock market transaction cost
Authors
Frank O. Kwabi
Agyenim Boateng
Publication date
27-07-2020
Publisher
Springer US
Published in
Review of Quantitative Finance and Accounting / Issue 3/2021
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-020-00914-9

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