How to Test an Insider Trading Law and Its Effectiveness : Price Movements and Comparative Empirical Data from Taiwan

The enforcement of insider trading law, as well as its effect, has been a quandary in securities law. The main reason for this perplexity comes from the fact that there is no tally of how many illegal trading activities are actually taking place. The exchange of information that incites insider trading is secretive or disguised, and the purported victim has no sense of being harmed or defrauded. If unreported, the crime may go uninvestigated. So, despite the highly publicized insider trading cases that are hailed in newspapers or the victories won in court, it is unclear how many other activities go undetected and how solid the acclaimed victory truly is. This study proposes and applies a method for testing the effectiveness of a law against insider trading through an event study. We use pre-announcement price run-up as a proxy for measuring the effectiveness of Taiwanese insider trading law. After examining mergers and acquisitions data from Taiwan's Financial Supervisory Commission from 2003 to 2016 and adjusting for market effect, we arrive at an average cumulative abnormal return of 6.62% before the official announcement of the events, which constitutes a 58.8% run-up compared with the post-announcement price increase. This investigation is important because it is the first to suggest an objectively empirical observation that approximates the overall size of illegal insider trading activities in a market. More importantly, this method could serve as a sensitive tool for measuring temporal changes brought about by different legal arrangements within a single country or for measuring comparatively across different legal regimes