Insider Trading and the Managerial Choice among Risky Projects

Lucian A. Bebchuk · Chaim Fershtman

80 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Corporate Finance and Governance Financial Markets and Investment Strategies Capital Investment and Risk Analysis

Abstract

The concern of this paper is with the effects of insider trading on ex ante managerial behavior. Specifically, the paper focuses on how insider trading affects insiders' choice among investment projects. Other things equal, insider trading leads insiders to choose riskier investment projects, because increased volatility of results enables insiders to make greater trading profits if they learn these results in advance of the market. Thiseffect might be beneficial, however, because insiders' risk aversion pulls them toward aconservative investment policy. Insiders' choices of projects are identified and compared with insider trading and those without such trading. Using these results, the conditions under which insider trading increases or decreases corporate value by affecting the choice of projects with uncertain returns are identified.

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References

1985Continuous Auctions and Insider Trading 1985Bid, ask and transaction prices in a specialist market with heterogeneously informed traders 1987Aggregation and Linearity in the Provision of Intertemporal Incentives 1974Special Information and Insider Trading 1986Insiders' profits, costs of trading, and market efficiency 1992Insider Trading and the Efficiency of Stock Prices 1991Insider Trading around Dividend Announcements: Theory and Evidence 2016Insider Trading In A Rational Expectations Economy

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2015Exchange trading rules, surveillance and suspected insider trading 2016Market Manipulation and Innovation 2014Insider Trading Controversies: A Literature Review 2006The effect of directors’ equity incentives on earnings management 2021The Dollar Profits to Insider Trading 2017The real effect of the initial enforcement of insider trading laws

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