Publication Type: Conference Paper/Unpublished Manuscript
Review Method: Peer Reviewed
Abstract: I argue that higher levels of capital openness lead states to both adopt and enforce insider trading laws earlier than they would have if they were less open to capital flows. I develop my argument by identifying the actors with stakes in insider trading, carefully deriving their preferences from their economic interests, and then explaining why capital mobility is likely to empower the proponents of insider trading prohibitions. The key groups, the insiders and outsiders within firms, have very different preferences for insider trading and hence for its prohibition. Whereas insiders benefit from making stock trades on inside information, outsiders pay costs as a result of those trades, in terms of higher trading costs. By facilitating the growth of stock markets and benefiting the most mobile segments of the capital class (outsiders), capital openness augments the power of outsiders relative to insiders and increases the probability that policy will change in a manner that is consistent with their interests. I use survival analysis test this argument and examine the timing of the adoption and enforcement of insider trading laws in 20 OECD countries. The results strongly support my basic argument. Finally, I briefly consider the German case, which comes up as a significant anomaly in the quantitative analysis and offer some evaluation of how it affects my theory.