The Effects of Insider Trading on Insiders' Choice Among Risky Investment Projects
This paper studies certain effects of insider trading on the principal-agent problem in corporations. Specifically, we focus on 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. This effect might or might not be beneficial, however, because insiders' risk-aversion pulls them toward a conservative investment policy. We identify and compare insiders' choices of projects with insider trading and those without such trading. We also study the optimal contract design with insider trading and without such trading, thus identifying the effects that allowing such trading has on other elements of insiders' compensation. Using these results, we identify the conditions under which insider trading increases or decreases corporate value by affecting the choice of projects with uncertain returns .
|Date of creation:||Feb 1991|
|Date of revision:|
|Publication status:||published as Journal of Financial and Quantitative Analysis, vol. 29, no. 1, pp. 1-4 (1994)|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Lucian Arye Bebchuk & Chaim Fershtman, 1991.
"The Effect of Insider Trading on Insiders' Reaction to Opportunities to "Waste" Corporate Value,"
NBER Technical Working Papers
0095, National Bureau of Economic Research, Inc.
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570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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