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Does the Adoption of an Information-Connected Approach Reduce Insider Trading?

Many countries adopt either an information-connected approach or the person-connected approach to regulate insider trading. In this paper, we examine the impact of countries switching from a person-connected approach to an information-connected approach using 502 tender offer announcements in Singapore, Malaysia and Australia, over the period from 1986 to 2006. We find that illegal insider trading in Singapore decreases with the enactment of insider trading regulations. Insider trading in Malaysia, on the other hand, only decreases after the enforcement of insider trading regulations. For Australia, we observe that the enactment or enforcement of insider trading regulation has little impact on the market. Our findings show that market participants react to legislation change earlier if the regulator concerned has a strong reputation for enforcement. In other words, the timing at which the market can be expected to react to legislation changes is a function of a government's reputation for enforcement.