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INSIDER TRADING, REGULATION, AND THE COMPONENTS OF THE BID–ASK SPREAD
Author(s) -
Frijns Bart,
Gilbert Aaron,
TouraniRad Alireza
Publication year - 2008
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2008.00238.x
Subject(s) - insider trading , information asymmetry , volatility (finance) , insider , bid–ask spread , ask price , business , bid price , asymmetry , financial economics , price discovery , econometrics , monetary economics , economics , finance , market liquidity , law , political science , futures contract , physics , quantum mechanics
In this article we investigate the relation between insider trading regulations and the bid–ask spread. We decompose the spread into its components before and after the enactment of strict new insider trading rules in New Zealand. We find that the enactment led to a significant decrease in the information asymmetry component of the spread, which is observed mainly in illiquid and high prechange information asymmetry companies. These findings are robust to model specification. In addition, we find a decrease in the contribution of information asymmetry to price volatility.