Informed trading and the consistent enforcement hypothesis: Evidence from bid–ask spreads in France and Britain

Abstract

This study addresses the issue of continuous legal enforcement on informed trading. Informed trading widens bid–ask spreads. Past studies show that one time enforcement of insider trading laws decreases bid–ask spread, but does not address repeat or continuous enforcement. Specifically, this study examines the introduction of insider trading laws on the bid–ask spreads in France and Britain. France has a much stronger record of enforcement than Britain does. According to the consistent enforcement hypothesis, French spreads should narrow more than British spreads because laws are made more credible by more enforcement. In France, the bid–ask spread narrows after the introduction of the new insider trading law even after controlling for other factors. The narrowing is related to the size of the spread before the introduction of the law. In Britain, the bid–ask spread does not narrow after the new insider trading law.