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We investigate the relation between a country's first-time enforcement of insider trading laws and stock price informativeness using data from 48 countries over 1980-2003. Enforcement of insider trading laws improves price informativeness, as measured by firm-specific stock return variation, but this increase is concentrated in developed markets. In emerging market countries, price informativeness changes insignificantly after the enforcement, as the important contribution of insiders in impounding information into stock prices largely disappears. The enforcement does not achieve the goal of improving price informativeness in countries with poor legal institutions. It does turn some private information into public information, thereby reducing the cost of equity in emerging markets. (JEL G14, G38) The costs and benefits of insider trading and the need for regulation are an ongoing question in the finance literature. One view is that insider trading makes an important contribution with regard to the timely and accurate incorporation of information into stock prices. That is, insider trading contributes to more informative stock prices, in that prices actually reflect the firm's true value (Manne, 1966;Carlton and Fischel, 1983).An opposite view theorizes that insider trading crowds out information collection by outside investors by limiting the gains available to outside investors (Fishman and Hagerty, 1992). Market professionals devote fewer resources to collecting information once they know there is a high probability of trading with insiders who have superior knowledge. If the crowding-out effect (deterring others from obtaining information) dominates, insider trading can actually make stock prices informationally less efficient. Critics of insider trading also suggest that by increasing information asymmetries, insider trading discourages investment (Ausubel, 1990) RFS Advance Access published July 23, 2008The Review of Financial Studies / v 00 n 000 2008 rise to additional adverse selection problems and inefficient corporate behavior (Manove, 1989).We address this question by investigating the impact of a country's first-time enforcement of insider trading laws on stock price informativeness around the world. The sample includes 48 countries, and the period is 1980-2003, when many countries started to enforce laws restricting insider trading. This sample allows us to explore a broad cross-section of countries, as well as the time series dynamics of price informativeness.Our hypothesis is that stock prices become more informative after an initial enforcement of insider trading laws. Different types of informed market participants can make different contributions to information collection and incorporation of information into stock prices. We analyze the roles of the various market participants by exploring variations in countries' information and institutional environments.There is empirical evidence that the enforcement of insider trading laws significantly reduces the country-level cost of equity (Bhat...

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