Insider Trading and the Problem of Corporate Agency
This article models an economy in which managers, whose efforts affect firm performance, are able to make "inside" trades on claims whose value is also dependent on firm performance it is shown that insider trading opportunities are a substitute for effort-assuring compensation packages. Insider-trading opportunities produce only partial effort incentives. However, they are sometimes less expensive incentive-alignment devices than effort-assuring compensation contracts, which may require payments to the manager in excess of reservation levels. Because some of the increase in value from permitting trade comes not from increased output but rather from the reduction in managerial rents, shareholders have an incentive to permit insider trade even when preventing managerial trade and paying effort-assuring compensation to managers produces greater output. Copyright 1997 by Oxford University Press.
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Volume (Year): 13 (1997)
Issue (Month): 2 (October)
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- Ausubel, Lawrence M, 1990. "Insider Trading in a Rational Expectations Economy," American Economic Review, American Economic Association, vol. 80(5), pages 1022-1041, December.
- 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.
- Michael Manove, 1989. "The Harm from Insider Trading and Informed Speculation," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 823-845.
- Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.