Market Imperfections and Regulatory Intervention: The Case of Insider Trading Regulation in the Indian Stock

Abstract

This paper’s aim is two-fold. First, to investigate whether regulatory intervention, to improve insider trading transparency, leads to higher information production. Second, to understand how market imperfections can distort uniform impact expected out of regulatory intervention. We use Indian stock market regulator-SEBI’s regulatory intervention on insider trading as a natural experiment for our investigation. Using 22,571 insider trades, that occurred between 2007 to 2011, we report the following main findings: (1) Our estimates show that, Firm Officers, on average, made around Rs.4 profit per share more than ordinary shareholders for every round trip transaction during pre-regulatory intervention period. Regulatory intervention reduces such profiteering activity. (2) Regulatory intervention significantly improved information production associated with insider trades. (3) Market imperfections in the form of variations in firm organisation structure and competition environment, can explain lack of uniform impact due to regulatory intervention. Our results lead us to conclude that regulatory intervention is generally effective (Brochet, 2010), however the efficacy cannot be uniform unless regulatory intervention goes hand-in-hand with regulatory investment and coordination aimed at addressing market imperfections (Fernandes and Ferreira, 2008).