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Contractual restrictions on insider trading: a welfare analysis

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  • Antonio E. Bernardo

    ()
    (Anderson Graduate School of Management, U.C.L.A. 110 Westwood Plaza Box 951481, Los Angeles, CA 90095-1481, USA)

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    Abstract

    This paper analyzes the welfare effects of permitting firms to negotiate contractually the right to allow corporate insiders to trade shares in the firm on private information. A computational framework is employed to (i) analyze formally the effects of insider trading on managerial investment choice, the informational efficiency of stock prices, and the welfare of all investor types; and (ii) examine the effectiveness of various compensation schemes (such as stock and insider trading rights) to mitigate conflicts of interest between managers and shareholders. I show that shareholders will typically choose not to grant insider trading rights to managers. This decision is socially optimal.

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    Bibliographic Info

    Article provided by Springer in its journal Economic Theory.

    Volume (Year): 18 (2001)
    Issue (Month): 1 ()
    Pages: 7-35

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    Handle: RePEc:spr:joecth:v:18:y:2001:i:1:p:7-35

    Note: Received: September 23, 2000; revised version: December 12, 2000
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    Web page: http://link.springer.de/link/service/journals/00199/index.htm

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    Related research

    Keywords: Insider trading; Rational expectations equilibrium; Asymmetric information; Contracts; Investment policy.;

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    Cited by:
    1. Robert McGee, 2010. "Analyzing Insider Trading from the Perspectives of Utilitarian Ethics and Rights Theory," Journal of Business Ethics, Springer, vol. 91(1), pages 65-82, January.

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