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Insider Trading and the Problem of Corporate Agency

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Author Info
Noe, Thomas H

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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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Publisher 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 listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(1), pages 3-40. [Downloadable!] (restricted)
  3. Ausubel, Lawrence M, 1990. "Insider Trading in a Rational Expectations Economy," American Economic Review, American Economic Association, vol. 80(5), pages 1022-41, December. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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 Stephen M. Ross Business School. [Downloadable!]
  2. Peter-Jan Engelen & Luc Van Liedekerke, 2006. "An Ethical Analysis of Regulating Insider Trading," Working Papers 06-05, Utrecht School of Economics. [Downloadable!]
  3. Jie Hu & Thomas H. Noe, 1997. "The insider trading debate," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 34-45. [Downloadable!]
  4. Jie Hu & Thomas H. Noe, 1997. "Insider trading, costly monitoring, and managerial incentives," Working Paper 97-2, Federal Reserve Bank of Atlanta. [Downloadable!]
  5. Lucian Arye Bebchuk & Christine Jolls, 2000. "Managerial Value Diversion and Shareholder Wealth," NBER Working Papers 6919, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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This page was last updated on 2009-12-15.

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