The Effects of Insider Trading on Insiders' Choice Among Risky Investment Projects
38 Pages Posted: 27 Jun 2007 Last revised: 8 Apr 2023
Date Written: February 1991
Abstract
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 .
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Transparency, Financial Accounting Information, and Corporate Governance
By Robert M. Bushman and Abbie J. Smith
-
Financial Accounting Information and Corporate Governance
By Robert M. Bushman and Abbie J. Smith
-
What Determines Corporate Transparency?
By Robert M. Bushman, Joseph D. Piotroski, ...
-
The World Price of Earnings Opacity
By Utpal Bhattacharya, Hazem Daouk, ...
-
R-Squared Around the World: New Theory and New Tests
By Stewart C. Myers and Li Jin
-
R-Squared Around the World: New Theory and New Tests
By Stewart C. Myers and Li Jin
-
Does Greater Firm-Specific Return Variation Mean More or Less Informed Stock Pricing?
By Art Durnev, Randall Morck, ...
-
Does Greater Firm-Specific Return Variation Mean More or Less Informed Stock Pricing?
By Art Durnev, Randall Morck, ...
-
Analyst Activity Around the World
By James J. Chang, Tarun Khanna, ...