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Insider Trading, Investment and Liquidity: A Welfare Analysis

Author

Listed:
  • Giovanna Nicodano
  • Sudipto Bhattacharya

Abstract

We compare competitive equilibrium outcomes with and without trading by a privately informed ¶monopolistic¶ insider, in a model with real investment portfolio choices ex ante, and noise trading generated by aggregate uncertainty regarding other agents intertemporal consumption preferences. The welfare implications of insider trading for the ex ante expected utilities of outsiders are analysed. The role of interim information revelation due to insider trading, in improving the risk-sharing among outsiders with stochastic liquidity needs, is examined in detail.

Suggested Citation

  • Giovanna Nicodano & Sudipto Bhattacharya, 1999. "Insider Trading, Investment and Liquidity: A Welfare Analysis," FMG Discussion Papers dp334, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp334
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    Cited by:

    1. Pei Peter Lung & Pisun Xu, 2014. "Tipping and Option Trading," Financial Management, Financial Management Association International, vol. 43(3), pages 671-701, September.
    2. Giovanni Cespa, 2008. "Information Sales and Insider Trading with Long‐Lived Information," Journal of Finance, American Finance Association, vol. 63(2), pages 639-672, April.
    3. Yuri Pettinicchi, 2012. "Financial Literacy, Information Acquisition and Asset Pricing Implications," Working Papers 2012_03, Department of Economics, University of Venice "Ca' Foscari".
    4. Juan Jose Cruces & Enrique L. Kawamura, 2005. "Insider Trading and Corporate Governance in Latin America: A Sequential Trade Model Approach," Working Papers 86, Universidad de San Andres, Departamento de Economia, revised Dec 2005.
    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. Liang, Woan-lih & Lin, Hsiou-wei W. & Syu, Yir-Jung, 2010. "Precision of Investor Information and Financial Disclosure," International Review of Economics & Finance, Elsevier, vol. 19(4), pages 627-632, October.
    7. Athanasakou, Vasiliki & Simpson, Ana, 2016. "Investor attention to rounding as a salient forecast feature," International Journal of Forecasting, Elsevier, vol. 32(4), pages 1212-1233.
    8. Randall Morck & Bernard Yeung & Wayne Yu, 2013. "R-squared and the Economy," NBER Working Papers 19017, National Bureau of Economic Research, Inc.
    9. Ben Said Hatem, 2017. "A Study of a Causality Relationship between Firm Investment and Cash Holdings: An Empirical Validation from French, Germany and Italy," Business and Economic Research, Macrothink Institute, vol. 7(1), pages 308-322, June.
    10. He, Xue-Zhong (Tony) & Shi, Lei & Tolotti, Marco, 2025. "The social value of information uncertainty," Journal of Economic Behavior & Organization, Elsevier, vol. 229(C).
    11. Arnoud W. A. Boot & Radhakrishnan Gopalan & Anjan V. Thakor, 2008. "Market Liquidity, Investor Participation, and Managerial Autonomy: Why Do Firms Go Private?," Journal of Finance, American Finance Association, vol. 63(4), pages 2013-2059, August.
    12. Andrea Marcello Buffa, 2004. "Strategic Insider Trading with Imperfect Information: A Trading Volume Analysis," Rivista di Politica Economica, SIPI Spa, vol. 94(6), pages 101-143, November-.
    13. Raffi Indjejikian & Hai Lu & Liyan Yang, 2014. "Rational Information Leakage," Management Science, INFORMS, vol. 60(11), pages 2762-2775, November.
    14. Maug, Ernst, 2002. "Insider trading legislation and corporate governance," European Economic Review, Elsevier, vol. 46(9), pages 1569-1597, October.
    15. Giovanni Cespa, 2008. "Information Sales and Insider Trading with Long‐Lived Information," Journal of Finance, American Finance Association, vol. 63(2), pages 639-672, April.
    16. Liu, Dehong & Lung, Pei Peter & Lallemand, Justin, 2015. "Anticipation of takeovers in stock and options markets," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 19-35.
    17. Benjamin M. Blau & Todd G. Griffith & Ryan J. Whitby, 2022. "On the Ethics of “Non-Corporate” Insider Trading," Journal of Business Ethics, Springer, vol. 177(1), pages 79-93, April.
    18. Fabio C. Bagliano & Carlo A. Favero & Giovanna Nicodano, 2011. "Insider Trading, Traded Volume and Returns," Working papers 26, Former Department of Economics and Public Finance "G. Prato", University of Torino.
    19. Luke M. Bennett & Wei Hu, 2023. "Filtration enlargement‐based time series forecast in view of insider trading," Journal of Economic Surveys, Wiley Blackwell, vol. 37(1), pages 112-140, February.
    20. 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.

    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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