Insider Trading Regulation On Company Value The Role Of Research

Insider trading is considered as an agent problem in essence. And this kind of phenomena will be enhanced by the increase of the information asymmetry between insiders and other investors. The fundamental principle of regulating insider trading is that insider trading erodes the fiduciary relationship that lies at the heart of our business organizations.Insider trading legislation may adjust the relationship of interest between shareholders and managers, and forms different corporate governance structure, consequently affects corporate performance. In general, large shareholder is often of potential motivation to monitoring management, also has strong incentive of dealing with insider trading. The profits from insider trading by large shareholders may be regarded as an opportunity cost of monitoring management, The strict insider trading regime cuts off approaches of gaining profits from insider trading by large shareholders, therefore compels large shareholders to engage in more monitoring activities, so as to gain more capital earnings, thereby reduces agent costs and increases corporation value. However, the costs from monitoring management by large shareholders must be compensated sufficiently, and insider trading is just a compensating source. When large shareholders can't obtain profits from insider trading enough to compensate monitoring costs, they will reduce monitoring management, here the strict insider trading regulation increases corporate agent costs on the contrary, consequently reduces corporate value.It is proved in theory and in practice that the market liquidity is an important factor of obtaining insider trading profits by large shareholders, also an important reference index to policy maker for insider trading. In details, when market liquidity is sufficient large, the strict insider trading regime can union large shareholders with small shareholders to intervene in the management of the firm frequently, therefore reduces agent costs and increases value of the firm; But if market liquidity is not enough large, the over strict insider trading regulation can't increase value of the firm. On the opinion of large shareholders, when corporate ownership is concentrated and the market liquidity is large, they will choose lenient insider trading regime, so large shareholders collude with management at the expense of small shareholders.Insider trading is a fashionable phenomenon in Chinese security markets, traditional insider and corporation engaging in insider trading play main roles. This is closely connected with lack of supervising efficiency andinstitution disadvantage of Chinese security markets, such as lack of corporation institution under efficient governance, market institution with deformed function, rigid management system of state property right, weak credit institution, non-marketable supervising institution, and extensive law system etc. On the contrary of international experience, it shows that positive correlation exists significantly between insider trading regulation and value of all kinds of listed firms in Chinese security markets. This result demonstrates the potential of insider trading regulation in strengthening corporate governance, reducing agent costs and increasing value of firms. But it also seems that a evidence is supported in lack of supervising efficiency and ill corporate governance. So at present, it is powerful measure and institutional guarantee in increasing value of firms to energetically strengthen insider trading legislation, standardize enforcement of insider trading law, consummate corporate merging market, scientifically develop institutional investors and ameliorate corporate governance structure etc.