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Insider competition under two-dimensional uncertainty and informational asymmetry

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  • Bade, Marco

Abstract

This paper shows that the consideration of two-dimensional uncertainty affecting cash flows and the existence of multiple, heterogeneously informed insiders provide reversed findings concerning aggregate insider trading profit and market liquidity. In particular, it is shown that heterogeneously informed insiders trade more aggressively. This sensitizes market makers and aggravates illiquidity. As a result, aggregate trading profit of two insiders is greater compared to one monopolist whereas traditional models state that competition increases liquidity and reduces total trading profit. Hence, from a welfare perspective, competition among insiders may be counterproductive.

Suggested Citation

  • Bade, Marco, 2016. "Insider competition under two-dimensional uncertainty and informational asymmetry," Finance Research Letters, Elsevier, vol. 19(C), pages 79-82.
    • Handle: RePEc:eee:finlet:v:19:y:2016:i:c:p:79-82
    DOI: 10.1016/j.frl.2016.06.006
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    References listed on IDEAS

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    1. Bade, Marco & Hirth, Hans, 2016. "Liquidity cost vs. real investment efficiency," Journal of Financial Markets, Elsevier, vol. 28(C), pages 70-90.
    2. Khanna, Naveen & Slezak, Steve L & Bradley, Michael, 1994. "Insider Trading, Outside Search, and Resource Allocation: Why Firms and Society May Disagree on Insider Trading Restrictions," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 575-608.
    3. Shin, Jhinyoung, 1996. "The Optimal Regulation of Insider Trading," Journal of Financial Intermediation, Elsevier, vol. 5(1), pages 49-73, January.
    4. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    5. 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.
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