Working Paper: NBER ID: w21634
Authors: Ross Levine; Chen Lin; Lai Wei
Abstract: This paper assesses whether legal systems that protect outside investors from corporate insiders increase or decrease the rate of technological innovation. Based on over 75,000 industry-country-year observations across 94 economies from 1976 to 2006, we find that enforcing insider trading laws spurs innovation—as measured by patent intensity, scope, impact, generality, and originality. Consistent with theories that insider trading slows innovation by impeding the valuation of innovative activities, the relationship between enforcing insider trading laws and innovation is much larger in industries that are naturally innovative and opaque, and equity issuances also rise much more in these industries after a country starts enforcing its insider trading laws.
Keywords: insider trading; innovation; patents; financial markets; legal systems
JEL Codes: F63; F65; G14; G18; O3; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Enforcement of insider trading laws (G18) | Increase in patenting activities (O39) |
| Enforcement of insider trading laws (G18) | Increase in citation counts (A14) |
| Enforcement of insider trading laws (G18) | Improvement in valuation of innovative activities (O39) |
| Enforcement of insider trading laws (G18) | Enhancement of market liquidity (G10) |
| Enforcement of insider trading laws (G18) | Encouragement of resources devoted to valuing firms (G32) |
| Enforcement of insider trading laws (G18) | Increase in equity issuances in innovative industries (G24) |
| Enforcement of insider trading laws (G18) | Lower cost of capital for investment in innovation (G31) |