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Investment and Insider Trading

Author Info

Listed author(s):
  • 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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File URL: http://www.hss.caltech.edu/SSPapers/sswp830.pdf
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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
Publication status: Published:
Handle: RePEc:clt:sswopa:830
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Order Information: Postal: Working Paper Assistant, Division of the Humanities and Social Sciences, 228-77, Caltech, Pasadena CA 91125
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Cited by:

  1. Maug, Ernst, 2002. "Insider trading legislation and corporate governance," European Economic Review, Elsevier, vol. 46(9), pages 1569-1597, October.
  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. Luis Angel Medran & Xavier Vives, 2004. "Regulating Insider Trading When Investment Matters," Review of Finance, European Finance Association, vol. 8(2), pages 199-277.
  4. repec:spr:manint:v:47:y:2007:i:5:d:10.1007_s11575-007-0043-z is not listed on IDEAS
  5. 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.
  6. 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.
  7. repec:eee:jaecon:v:63:y:2017:i:2:p:207-230 is not listed on IDEAS
  8. Michael Firth & T. Y. Leung & Oliver M. Rui, 2009. "Insider Trading in Hong Kong: Tests of Stock Returns and Trading Frequency," Working Papers 042009, Hong Kong Institute for Monetary Research.
  9. 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.
  10. repec:eee:jetheo:v:169:y:2017:i:c:p:517-545 is not listed on IDEAS

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