The Effects of Insider Trading on Insiders' Choice Among Risky Investment Projects / Lucian Arye Bebchuk, Chaim Fershtman.

Format:

Book

Author/Creator:

Bebchuk, Lucian Arye.

Contributor:

National Bureau of Economic Research.

Fershtman, Chaim.

Series:

Technical Working Paper Series (National Bureau of Economic Research) no. t0096.

NBER technical working paper series no. t0096

Language:

English

Subjects (All):

Insider trading in securities.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1991.

Cambridge, Massachussetts : National Bureau of Economic Research, [1991]

Summary:

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 .

Notes:

Print version record

February 1991.