1. “Culture and the Regulation of Insider Trading across Countries”, with Brandon Cline and Claudia Williamson. Journal of Corporate Finance, (2021) Vol. 67, 101917.
We find that individualistic countries regulate insider trading activities more intensely. The result is robust to controlling for alternative culture variables, additional controls, and instrumental variable analysis. We also document that individualism’s effect is magnified in democratic countries. In addition, we study the economic and financial consequences of individualism, insider trading regulation, and its enforcement. The analysis suggests that individualism and the enforcement of insider trading regulation promote financial development. Interaction effects reveal that individualism and insider trading regulation serve as complements to promote financial development. These findings contribute to the insider trading debate since regulation alone may not be the primary determinant of market efficiency. Combined, our results challenge prior works concluding that individualism is anti-regulation.
2. “Trust, Regulation, and Market Efficiency”, with Brandon Cline and Claudia Williamson. Public Choice, forthcoming.
Building from the interest group theory of regulation, we posit that trust alters the payoff from regulatory rent-seeking relative to profit-seeking. Trust reduces the costs of productive economic exchange by lowering transaction costs, thus raising the cost of rent-seeking behavior. In addition, trust also increases political accountability, discouraging politicians from creating regulatory rents. We therefore hypothesize that trust reduces the extent of business regulation while simultaneously facilitating market efficiency. To test that hypothesis, we construct an overall business regulation index measuring procedures, time, and cost along eight dimensions of doing business in a country. The empirical results reveal that trust negatively relates to business regulation but positively relates to market efficiency. Interaction and split-sample results indicate further that trust and business regulation are substitutes. Collectively, the findings reported herein suggest that business regulation itself is not the root cause of market inefficiency, but rather lack of trust is the dominant factor.