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Investment and Insider Trading

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  • Bernhardt, Dan
  • Hollifield, Burton
  • Hughson, Eric

Abstract

We study insider trading in a dynamic setting. Rational, but uninformed, traders choose between investment projects with different levels of insider trading Insider trading distorts investment toward assets with less private information. However, when investment is sufficiently information elastic, insider trading can be welfare-enhancing because of more informative prices. When insiders repeatedly receive information, they trade to reveal it when investment is information elastic because good news increases investment and hence future insider profits. Thus, more information is revealed and uninformed agents are exploited less frequently by insiders. Both effects are Pareto-improving. Finally, we consider various insider-trading regulations. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Bibliographic Info

Paper provided by California Institute of Technology, Division of the Humanities and Social Sciences in its series Working Papers with number 830.

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Date of creation: Mar 1993
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Publication status: Published:
Handle: RePEc:clt:sswopa:830

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Postal: Working Paper Assistant, Division of the Humanities and Social Sciences, 228-77, Caltech, Pasadena CA 91125
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Cited by:
  1. Franklin Allen & Richard Herring, 2001. "Banking Regulation versus Securities Market Regulation," Center for Financial Institutions Working Papers 01-29, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Oded, Jacob, 2011. "Stock repurchases: How firms choose between a self tender offer and an open-market program," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3174-3187.
  3. Chi-Wen Lee & Zemin Lu, 2008. "Trading on inside information when there may be tippees," Review of Quantitative Finance and Accounting, Springer, vol. 31(3), pages 241-260, October.
  4. Michael Firth & T. Y. Leung & Oliver M. Rui, 2011. "Insider Trading in Hong Kong: Tests of Stock Returns and Trading Frequency," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 14(03), pages 505-533.
  5. Medrano, Luis Angel & Vives, Xavier, 2002. "Regulating Insider Trading when Investment Matters," CEPR Discussion Papers 3292, C.E.P.R. Discussion Papers.
  6. Andrea M. Buffa & Giovanna Nicodano, 2008. "Should Insider Trading be Prohibited when Share Repurchases are Allowed?," Review of Finance, European Finance Association, vol. 12(4), pages 735-765.
  7. Maug, Ernst, 2002. "Insider trading legislation and corporate governance," European Economic Review, Elsevier, vol. 46(9), pages 1569-1597, October.

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