DOES THE ADOPTION OF AN INFORMATION-CONNECTED APPROACH REDUCE INSIDER TRADING

Abstract

Many countries adopt one of two broad approaches to regulate insider trading: a person-connected regime or an information-connected regime. This study investigates whether a change from a person-connected regime to an information-connected regime reduces insider trading. To this end, I compare abnormal price and volume movements, as well as insider trading profits, in the run-up to tender offer announcements before and after the change in regimes. Using data on Singapore, Malaysia and Australia, over the period from 1986 to 2006, I find that insider trading decreases in both Singapore and Malaysia after the regime change. However, the decrease in insider trading is found to occur after the enactment of the legislation in Singapore, whereas for Malaysia, the decrease in insider trading is found to occur after the legislation is enforced. For Australia, I find that insider trading increases after the enactment of legislation. These findings not only suggest that the adoption of an information-connected approach is effective in reducing insider trading, but also highlight the importance of enforcement in determining market reaction