Insider Trading and the Managerial Choice among Risky Projects

Lucian Arye Bebchuk, Chaim Fershtman

Research output: Contribution to journalArticlepeer-review

Abstract

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.

Original languageEnglish
Pages (from-to)1-14
Number of pages14
JournalJournal of Financial and Quantitative Analysis
Volume29
Issue number1
DOIs
StatePublished - Mar 1994
Externally publishedYes

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