TY - JOUR
T1 - Insider Trading and the Managerial Choice among Risky Projects
AU - Bebchuk, Lucian Arye
AU - Fershtman, Chaim
N1 - Funding Information:
*Bebchuk, Harvard Law School, Harvard University, Boston, MA 02163 and the National Bureau of Economic Research. Fershtman, Department of Economics, Tel-Aviv University, Tel-Aviv 69978, Israel. The authors thank Howard Chang and Christine Jolls for helpful research assistance, Patricia Weber, JFQA Managing Editor Jonathan Karpoff, and JFQA Referee and Associate Editor Robert Heinkel for helpful comments and suggestions. Financial support for Bebchuk's work has been provided by the National Science Foundation and by the John M. Olin Foundation. Partial financial support for Fershtman's work has been provided by funds granted to the Foerder Institute for Economic Research by the Nur Moshe Fund.
PY - 1994/3
Y1 - 1994/3
N2 - The concern of this paper is with the effects of insider trading on ex ante managerial behavior. Specifically, the paper focuses on how insider trading affects 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 be beneficial, however, because insiders’ risk aversion pulls them toward a conservative investment policy. Insiders’ choices of projects are identified and compared with insider trading and those without such trading. Using these results, the conditions under which insider trading increases or decreases corporate value by affecting the choice of projects with uncertain returns are identified.
AB - The concern of this paper is with the effects of insider trading on ex ante managerial behavior. Specifically, the paper focuses on how insider trading affects 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 be beneficial, however, because insiders’ risk aversion pulls them toward a conservative investment policy. Insiders’ choices of projects are identified and compared with insider trading and those without such trading. Using these results, the conditions under which insider trading increases or decreases corporate value by affecting the choice of projects with uncertain returns are identified.
UR - http://www.scopus.com/inward/record.url?scp=84971847898&partnerID=8YFLogxK
U2 - 10.2307/2331187
DO - 10.2307/2331187
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AN - SCOPUS:84971847898
SN - 0022-1090
VL - 29
SP - 1
EP - 14
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
IS - 1
ER -