The effect of regulatory tightening on the information content of insider trades

Abstract

Regulatory tightening aims to curb opportunistic insider trading by reducing informational advantages. However, the effectiveness of such reforms, particularly in emerging markets with historically weak enforcement, remains debated. This study investigates the effect of regulatory tightening on the information content of insider trades in India, an emerging market. We focus on the implementation of the Prohibition of Insider Trading Regulations 2015, which introduced stricter disclosure requirements, higher penalties, and a reversal of the burden of proof. Using a comprehensive sample of insider trades from 2008 to 2024, we employ difference-in-differences and propensity score matching to assess changes in the predictive power of insider trades for future stock returns. Our findings indicate that the regulatory reforms did not diminish the overall informativeness of insider trades. Notably, while insider purchases retained their positive predictive value, insider sales, previously uninformative, gained significant negative information content post-regulation. These results suggest that enhanced enforcement may amplify rather than suppress the market’s ability to incorporate insider information, underscoring the role of rigorous implementation in emerging markets. We recommend that regulators prioritize enforcement mechanisms to balance investor protection with market efficiency.