1. When No Law is Better than a Good Law? Utpal Bhattacharya Hazem Daouk Discussant Randall Morck Jarislowsky Professor of Finance, The University of Alberta William Lyon Mackenzie-King Visiting Professor, Harvard University Research Association, National Bureau of Economic Research

2. No Law >> Unenforced Law No Drug Law –Merck and Pfizer sell clean heroin at low prices –Addicts, but no drug gangs Drug Law enforced –No heroin –No addicts, no drug gangs Drug Law, but imperfectly enforced –Drug gangs sells impure heroin at high prices –(Criminalized) addicts and (wealthy) drug gangs Fewer addicts? Maybe, or maybe not … Social welfare tradeoff –Externalities of more addicts v. externalities of drug gangs

3. More Relevant Example No Murder Law –Nice discussant comments –Paper’s mistakes not corrected Murder Law enforced –Negative discussant comments –Improved paper Murder Law, but imperfectly enforced –Nice people get negative comments and publish good papers –Scary people get nice comments and publish dumb papers Social Welfare calculation –Greater collegiality v Needn’t read articles carefully

4. Insider Trading Reasons for insider trading laws –Lower cost of capital to business Not necessarily of interest to established wealthy –Appeasement of IMF, World Bank, foreign investors Does anyone pay attention to dead letters? –Allows arbitrary prosecution of politically disloyal locals Al Capone v. Putin

5. Posner: Probabilistic Enforcement In the model, the law is either enforced or not –Perfect enforcement is impossible –Pr(convicted) x penalty > benefit  effective Martha Stewart Effect? –The US missed most insider trading, but when they catch one, they crucify her –Low Pr(convicted)  high penalty if convicted? Hillary Clinton Effect –Cattle futures insider trades generate little money –Benefit small  no point in risking trouble Recruit Effect? –Japan rarely prosecutes insider trading cases –Low penalty OK if Pr(public shame) large?

6. Is It Really Insider Trading? Bris estimate of insider profits prior to M&A from 1990 to 1999

7. Is It Really Insider Trading? Bris estimate of insider profits prior to M&A from 1990 to 1999

8. Latent Variables Having enforced an insider trading law once doesn’t seem to suppress insider trading around M&A Is insider trading around M&A events atypical? Might “having enforced an insider trading law” be proxying for other factors that help a stock market function better?

9. Latent Variables? The specification used is What if you run Does an insider trading law or its enforcement matter over and above law and order in general?