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Insider Trading and the Problem of Corporate Agency

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  • Noe, Thomas H

Abstract

This article models an economy in which managers, whose efforts affect firm performance, are able to make "inside" trades on claims whose value is also dependent on firm performance it is shown that insider trading opportunities are a substitute for effort-assuring compensation packages. Insider-trading opportunities produce only partial effort incentives. However, they are sometimes less expensive incentive-alignment devices than effort-assuring compensation contracts, which may require payments to the manager in excess of reservation levels. Because some of the increase in value from permitting trade comes not from increased output but rather from the reduction in managerial rents, shareholders have an incentive to permit insider trade even when preventing managerial trade and paying effort-assuring compensation to managers produces greater output. Copyright 1997 by Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Journal of Law, Economics and Organization.

Volume (Year): 13 (1997)
Issue (Month): 2 (October)
Pages: 287-318

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Handle: RePEc:oup:jleorg:v:13:y:1997:i:2:p:287-318

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References

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  1. Michael J. Fishman & Kathleen M. Hagerty, 1992. "Insider Trading and the Efficiency of Stock Prices," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 106-122, Spring.
  2. Ausubel, Lawrence M, 1990. "Insider Trading in a Rational Expectations Economy," American Economic Review, American Economic Association, vol. 80(5), pages 1022-41, December.
  3. Manove, Michael, 1989. "The Harm from Insider Trading and Informed Speculation," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 823-45, November.
  4. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
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Cited by:
  1. Chih-Jen Huang, 2010. "The joint decision to manage earnings through discretionary accruals and asset sales around insider trading: Taiwan evidence," Journal of Economics and Finance, Springer, vol. 34(3), pages 308-325, July.
  2. Jie Hu & Thomas H. Noe, 1997. "Insider trading, costly monitoring, and managerial incentives," Working Paper 97-2, Federal Reserve Bank of Atlanta.
  3. Brenner, Steffen, 2011. "On the irrelevance of insider trading for managerial compensation," European Economic Review, Elsevier, vol. 55(2), pages 293-303, February.
  4. P.J. Engelen & Luc van Liedekerke, 2006. "An ethical analysis of regulating insider trading," Working Papers 06-05, Utrecht School of Economics.
  5. Maug, Ernst, 2002. "Insider trading legislation and corporate governance," European Economic Review, Elsevier, vol. 46(9), pages 1569-1597, October.
  6. Laura Beny, 2006. "Do Investors Value Insider Trading Laws? International Evidence," William Davidson Institute Working Papers Series wp837, William Davidson Institute at the University of Michigan.
  7. Jan Zabojnik, 2014. "Stock-based Compensation Plans and Employee Incentives," Working Papers 1325, Queen's University, Department of Economics.
  8. Lucian Arye Bebchuk & Christine Jolls, 2000. "Managerial Value Diversion and Shareholder Wealth," NBER Working Papers 6919, National Bureau of Economic Research, Inc.
  9. Dewally, Michaƫl & Peck, Sarah W., 2010. "Upheaval in the boardroom: Outside director public resignations, motivations, and consequences," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 38-52, February.
  10. Leonard F.S. Wang & Ya-Chin Wang, 2010. "Stackelberg real-leader in an insider trading model," Studies in Economics and Finance, Emerald Group Publishing, vol. 27(1), pages 30-46, March.
  11. Hu, Jie & Noe, Thomas H., 2001. "Insider trading and managerial incentives," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 681-716, April.
  12. Jie Hu & Thomas H. Noe, 1997. "The insider trading debate," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 34-45.

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