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by Mats Grankvist
Institution: | University of New South Wales |
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Department: | Banking & Finance |
Degree: | |
Year: | 2005 |
Keywords: | Please verify keywords |
Posted: | |
Record ID: | 1053214 |
Full text PDF: | http://handle.unsw.edu.au/1959.4/23466 |
This thesis investigates the impact of insider trading regulation and its enforcement on bid-ask spreads, information asymmetry proxies, volatility, trade frequency and trade sizes. It employs an exclusive intra-day market-microstructure data-set for 29 countries and 32 exchanges and utilizes structural simultaneous equations models with distributed geometric lags estimated with GMM, controlling for market architecture, trading demand, minimum tick size and Fama-French factors. This thesis finds that enforcement of insider trading regulation in a country, rather than the strictness of written insider trading law, reduces information asymmetry and bid-ask spreads, increases volatility, and has an overall positive impact on traded value. The positive impact is mostly concentrated in the smallest stocks in the sample. The regulation of disclosure requirements has similar, but not identical, beneficial externalities in the market. The results support the prediction by Bhattacharya and Daouk (2002) that the fall in the cost of equity that results from insider trading prosecution in a country is due to a reduction in adverse selection. This thesis also find some support of the free inside information scenario of Medrano and Vives (2004), where volatility increases when insiders are forced to disclose the inside information before legally trading on it, if insider trading is not permitted and the regulation is enforced.
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