The International and Domestic Determinants of Insider Trading Laws

Abstract

Why do some countries protect minority shareholders from rent-seeking by corporate insiders while others do not? To the extent that there has been convergence toward shareholder-friendly laws, what factors have shaped that convergence? We explore this question by examining the worldwide diffusion of insider trading laws through a series of event history analyses. We argue that variation in the adoption and enforcement in insider trading laws can be best explained by the interaction of rising international competitive pressures to attract investment capital through investor-friendly laws and electoral laws that make governments more or less vulnerable to economic voting. We find that governments are more likely to adopt and enforce insider trading laws when they face reelection under electoral laws that make them relatively vulnerable to economic voting and when they face international competitive pressures. Moreover, we find that the impact of domestic political institutions declines in significance as international competitive pressures increase, and vice-versa.

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