The Impact of Enforcement of Insider Trading Laws and Financial Integration on Stock Market Liquidity: A Global Analysis

Stock market liquidity plays a significant and important role in promoting economic prosperity. Employing a large sample of 50 developed and developing countries/regions from 1980 to 2019, this thesis aims to contribute to the literature by introducing new determinants of stock market liquidity, including the enforcement of insider trading law and financial integration. In order to achieve its aims, the thesis investigates two main research issues. Firstly, it investigates the impact of the enforcement of insider trading laws on stock market liquidity. Secondly, it studies the impact of financial integration on stock market liquidity. The findings and the contributions of this thesis are summarized as follows. In relation to the impact of the enforcement of insider trading laws on stock market liquidity, the results show a significant and positive relationship between the enforcement of insider trading laws and stock market liquidity. The results are robust to alternative measures of stock market liquidity and alternative sample periods, with endogeneity concerns and other confounding effects also considered. This thesis research also investigates the two economic channels through which the enforcement of insider trading laws enhances stock market liquidity: stock price informativeness and ownership concentration. Furthermore, a cross-country analysis shows that the enforcement of insider trading laws improves stock market liquidity more effectively for countries with better governance and regulatory environments. Finally, this thesis shows that the enforcement of insider trading laws increases the value impact of stock market liquidity. Overall, this thesis highlights the importance of the enforcement of insider trading laws in promoting secondary market quality. Regarding the financial integration and stock market liquidity relationship, the findings suggest a positive and significant association between financial integration and stock market liquidity. These results are robust to different measures of liquidity and different sub-sample periods, with endogeneity concerns and other confounding effects also considered. The estimation results show that financial integration positively influences stock market liquidity. Three economic channels mainly drive the positive impact of financial integration and stock market liquidity: (1) asymmetric information, (2) cashflow risk, and (3) funding liquidity. In addition, the cross-country analysis results suggest that financial integration enhances stock market liquidity in countries with good corporate governance and regulations. The results also show that the positive impact of financial integration increases the value impact of stock market liquidity.