Insider Trading and Real Investment
AbstractIn this paper I analyze the effects of insider trading on real investment and the insurance role of financial markets. There is a single entrepreneur who, at a first stage, chooses the level of investment in a risky business. At the second stage, an asset with random payoff is issued and then the entrepreneur receives some privileged information on the likely realization of production return. At the third stage, trading occurs on the asset market, where the entrepreneur faces the aggregate demand coming from a continuum of rational uniformed traders and some noise traders. I compare the equilibrium with insider trading (when the entrepreneur trades on her inside information in the asset market) with the equilibrium in the same market without insider trading. I find that permitting insider trading tends to decrease the level of real investment. Moreover, the asset market is thinner and the entrepreneur's net supply of the asset and the hedge ratio are lower, although the asset price is more informative and volatile.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 149.
Date of creation: Dec 1995
Date of revision:
Contact details of provider:
Web page: http://www.econ.upf.edu/
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.