Do Criminal Sanctions Deter Insider Trading?

Many countries have adopted criminal sanctions as a way to deter insider trading. Although criminal sanctions represent a much greater penalty than civil sanctions, the enforceability of criminal sanctions is weaker given the higher burden of proof required. This trade-off between severity and enforceability implies that the impact of introducing criminal sanction is not unambiguous. In this paper we examine the impact of the introduction of criminal sanctions in New Zealand, where criminal sanctions (at the expense of civil sanctions) were enacted in February 2008. Using measures for the cost of trading, degree of information asymmetry, and probability of informed trading, we find that the enactment of this law has led to a deterioration in the market, indicating that the weaker enforceability outweighs the increased severity of the penalties