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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.

Suggested Citation

  • Noe, Thomas H, 1997. "Insider Trading and the Problem of Corporate Agency," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 13(2), pages 287-318, October.
  • Handle: RePEc:oup:jleorg:v:13:y:1997:i:2:p:287-318
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    References listed on IDEAS

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    1. repec:aei:rpbook:53302 is not listed on IDEAS
    2. Ausubel, Lawrence M, 1990. "Insider Trading in a Rational Expectations Economy," American Economic Review, American Economic Association, vol. 80(5), pages 1022-1041, December.
    3. 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.
    4. Michael Manove, 1989. "The Harm from Insider Trading and Informed Speculation," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 823-845.
    5. 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. Wei Zhang & Steven F. Cahan & Arthur C. Allen, 2005. "Insider Trading and Pay‐Performance Sensitivity: An Empirical Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9‐10), pages 1887-1919, November.
    2. 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;Academy of Economics and Finance, vol. 34(3), pages 308-325, July.
    3. Leonard F.S. Wang & Ya‐Chin Wang, 2010. "Stackelberg real‐leader in an insider trading model," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 27(1), pages 30-46, March.
    4. Cline, Brandon N. & Williamson, Claudia R. & Xiong, Haoyang, 2021. "Culture and the regulation of insider trading across countries," Journal of Corporate Finance, Elsevier, vol. 67(C).
    5. Wei Zhang & Steven F. Cahan & Arthur C. Allen, 2005. "Insider Trading and Pay-Performance Sensitivity: An Empirical Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9-10), pages 1887-1919.
    6. Jie Hu & Thomas H. Noe, 1997. "The insider trading debate," Economic Review, Federal Reserve Bank of Atlanta, vol. 82(Q 4), pages 34-45.
    7. Brenner, Steffen, 2011. "On the irrelevance of insider trading for managerial compensation," European Economic Review, Elsevier, vol. 55(2), pages 293-303, February.
    8. Bebchuk, Lucian Arye & Jolls, Christine, 1999. "Managerial Value Diversion and Shareholder Wealth," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(2), pages 487-502, July.
    9. Jan Zabojnik, 2014. "Stock-based Compensation Plans And Employee Incentives," Working Paper 1325, Economics Department, Queen's University.
    10. P. J. Engelen & L. Liedekerke, 2006. "An Ethical Analysis of Regulating Insider Trading," Working Papers 06-05, Utrecht School of Economics.
    11. Marius Cristian Milos & Laura Raisa Milos, 2017. "Regulation, Insider Trading And Stock Market Reaction. What Do We Know?," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 174-179, December.
    12. Maug, Ernst, 2002. "Insider trading legislation and corporate governance," European Economic Review, Elsevier, vol. 46(9), pages 1569-1597, October.
    13. Hu, Jie & Noe, Thomas H., 2001. "Insider trading and managerial incentives," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 681-716, April.
    14. Dewally, Michaël & 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.
    15. Chang, Millicent & Watson, Iain, 2015. "Delayed disclosure of insider trades: Incentives for and indicators of future performance?," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 182-197.
    16. 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.
    17. Jie Hu & Thomas H. Noe, 1997. "Insider trading, costly monitoring, and managerial incentives," FRB Atlanta Working Paper 97-2, Federal Reserve Bank of Atlanta.
    18. Chao Lu & Xuetong Zhao & Jingwen Dai, 2018. "Corporate Social Responsibility and Insider Trading: Evidence from China," Sustainability, MDPI, vol. 10(9), pages 1-17, September.

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