We analyze financial statements from 34 countries for the period 1984–1998 to construct a panel data set measuring three dimensions of reported accounting earnings for each country: earnings aggressiveness, loss avoidance, and earnings smoothing. We hypothesize that these three dimensions are associated with uninformative or opaque earnings, and so we combine these three measures to obtain an overall earnings opacity time-series measure per country. We then explore whether our three measures of earnings opacity affect two characteristics of an equity market in a country: the return the shareholders demand and how much they trade. While not all results are consistent for our three individual earnings opacity measures, our panel data tests document that, after controlling for other influences, an increase in overall earnings opacity in a country is linked to an economically significant increase in the cost of equity and an economically significant decrease in trading in the stock market of that country.

The existence and the enforcement of insider trading laws in stock markets is a phenomenon of the 1990s. A study of the 103 countries that have stock markets reveals that insider trading laws exist in 87 of them, but enforcement-as evidenced by prosecutions-has taken place in only 38 of them. Before 1990, the respective numbers were 34 and 9. We find that the cost of equity in a country, after controlling for a number of other variables, does not change after the introduction of insider trading laws, but decreases significantly after the first prosecution. An Insider (Primary or Secondary Insider) may not, by utilizing knowledge of Insider Information, acquire or dispose of Insider Securities for his or her own account or for the account of another person, or for another person.-Section 14 of the WpHG, Germany, 1994 LAWS PROHIBITING INSIDER TRADING came late to Germany. They had to come because the European Union required all its members to implement the European Community Insider Trading Directive (89/592/EEC of November 13, 1989). The lateness of Germany in establishing laws prohibiting insider trading, however, was not an exception. Posen (1991) notes that in the beginning of the 1990s, insider trading was not illegal in most European countries. The purpose of this paper is twofold. First, we carry out a comprehensive survey on the existence and the enforcement of insider trading laws around the world . Stamp and Welsh (1996, page x), in a study of insider trading laws in a small subset of developed countries, did not like what they found. We quote them: "[I]n conclusion, it is clear that a number of jurisdictions are either not interested in, or are not prepared to devote the necessary re-* Both authors are from the Kelley School of Business, Indiana University. This paper would not be possible without the information we received from the regulators and the representatives of the 103 stock markets that we contacted. We are deeply indebted to them. The first author is grateful to KAIST, South Korea, for allowing him the use of their Datastream data source when he was a visiting scholar there in the summer of 1999. Thanks are also due to seminar participants at Amsterdam,

The existence and the enforcement of insider trading laws in stock markets is a phenomenon of the 1990s. A study of the 103 countries that have stock markets reveals that insider trading laws exist in 87 of them, but enforcement-as evidenced by prosecutions-has taken place in only 38 of them. Before 1990, the respective numbers were 34 and 9. We find that the cost of equity in a country, after controlling for a number of other variables, does not change after the introduction of insider trading laws, but decreases significantly after the first prosecution.

We analyze the financial statements of 58,653 firm-years from 34 countries for the period 1985-1998 to construct a panel data set measuring three dimensions of reported accounting earnings for each countryearnings aggressiveness, loss avoidance, and earnings smoothing. We hypothesize that these three dimensions are associated with uninformative or opaque earnings, and so we combine these three measures to obtain an overall earnings opacity time-series measure per country. We then explore whether our three measures of earnings opacity affects two characteristics of an equity market in a country-the return the shareholders demand and how much they trade. While not all results are consistent for our three individual earnings opacity measures, our panel data tests document that, after controlling for other influences, an increase in overall earnings opacity in a country is linked to an economically significant increase in the cost of equity and an economically significant decrease in trading in the stock market of that country.

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