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Insider Trading and the Managerial Choice among Risky Projects

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  • Bebchuk, Lucian Arye
  • Fershtman, Chaim

Abstract

The concern of this paper is with the effects of insider trading on ex ante managerial behavior. Specifically, the paper focuses on how insider trading affects insiders' choice among investment projects. Other things equal, insider trading leads insiders to choose riskier investment projects, because increased volatility of results enables insiders to make greater trading profits if they learn these results in advance of the market. Thiseffect might be beneficial, however, because insiders' risk aversion pulls them toward aconservative investment policy. Insiders' choices of projects are identified and compared with insider trading and those without such trading. Using these results, the conditions under which insider trading increases or decreases corporate value by affecting the choice of projects with uncertain returns are identified.

Suggested Citation

  • Bebchuk, Lucian Arye & Fershtman, Chaim, 1994. "Insider Trading and the Managerial Choice among Risky Projects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(01), pages 1-14, March.
  • Handle: RePEc:cup:jfinqa:v:29:y:1994:i:01:p:1-14_00
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    Cited by:

    1. Narayanan, Ranga, 2000. "Insider trading and the voluntary disclosure of information by firms," Journal of Banking & Finance, Elsevier, vol. 24(3), pages 395-425, March.
    2. Aitken, Michael & Cumming, Douglas & Zhan, Feng, 2013. "Exchange trading rules, surveillance and insider trading," CFS Working Paper Series 2013/15, Center for Financial Studies (CFS).
    3. Volker Laux, 2010. "On the benefits of allowing CEOs to time their stock option exercises," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 118-138.
    4. Maug, Ernst, 2002. "Insider trading legislation and corporate governance," European Economic Review, Elsevier, vol. 46(9), pages 1569-1597, October.
    5. Hu, Jie & Noe, Thomas H., 2001. "Insider trading and managerial incentives," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 681-716, April.
    6. Baden-Fuller, Charles & Dean, Alison & McNamara, Peter & Hilliard, Bill, 2006. "Raising the returns to venture finance," Journal of Business Venturing, Elsevier, vol. 21(3), pages 265-285, May.
    7. Kusnadi, Yuanto, 2015. "Insider trading restrictions and corporate risk-taking," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 125-142.
    8. Cumming, Douglas & Dannhauser, Robert & Johan, Sofia, 2015. "Financial market misconduct and agency conflicts: A synthesis and future directions," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 150-168.
    9. Wielhouwer, Jacco L., 2013. "When is public enforcement of insider trading regulations effective?," International Review of Law and Economics, Elsevier, vol. 34(C), pages 52-60.
    10. 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.
    11. Jie Hu & Thomas H. Noe, 1997. "The insider trading debate," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 34-45.
    12. Aitken, Michael & Cumming, Douglas & Zhan, Feng, 2015. "Exchange trading rules, surveillance and suspected insider trading," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 311-330.
    13. Jie Hu & Thomas H. Noe, 1997. "Insider trading, costly monitoring, and managerial incentives," FRB Atlanta Working Paper 97-2, Federal Reserve Bank of Atlanta.
    14. John S. Jordan, 1997. "Manager's opportunistic trading of their firms' shares: a case study of executives in the banking industry," Working Papers 97-4, Federal Reserve Bank of Boston.
    15. Dev R. Mishra, 2017. "Post-innovation CSR Performance and Firm Value," Journal of Business Ethics, Springer, vol. 140(2), pages 285-306, January.
    16. repec:eee:corfin:v:45:y:2017:i:c:p:687-709 is not listed on IDEAS
    17. Dasgupta, Sudipto & Shin, Jhinyoung, 2004. "Managerial risk-taking incentives, product market competition and welfare," European Economic Review, Elsevier, vol. 48(2), pages 391-401, April.
    18. Vahe Lskavyan, 2015. "Insider regulation and the incentive to invest as an insider," Economics of Governance, Springer, vol. 16(3), pages 207-227, August.

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