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Insider Trading and the Managerial Choice among Risky Projects

Published online by Cambridge University Press:  06 April 2009

Lucian Arye Bebchuk  and
Chaim Fershtman
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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. Thiseffect might be beneficial, however, because insiders' risk aversion pulls them toward aconservative 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 29 , Issue 1 , March 1994 , pp. 1 - 14
Copyright
Copyright © School of Business Administration, University of Washington 1994

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