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Investment and Insider Trading

Dan Bernhardt¹; Burton Hollifield^2,3; Eric Hughson⁴

¹ Queen's University · ² University of British Columbia · ³ Carnegie Mellon University · ⁴ University of British Columbia California Insitute of Technology

We study insider trading in a dynamic setting. Rational, but uninformed, traders choose between investment projects with different levels of insider trading. Insider trading distorts investment toward assets with less private information. However, when investment is sufficiently information elastic, insider trading can be welfare-enhancing because of more informative prices. When insiders repeatedly receive information, they trade to reveal it when investment is information elastic because good news increases investment and hence future insider profits. Thus, more information is revealed and uninformed agents are exploited less frequently by insiders. Both effects are Pareto-improving. Finally, we consider various insider-trading regulations.

DOI

10.1093/rfs/8.2.501

Volume

8 (2)

Pages

501-543

Language

en

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BibTeX

Sources

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