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Investment and Insider Trading

Bernhardt, Dan and Hollifield, Burton and Hughson, Eric (1995) Investment and Insider Trading. Review of Financial Studies, 8 (2). pp. 501-543. ISSN 0893-9454. doi:10.1093/rfs/8.2.501.

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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 lessfrequently by insiders. Both effects are Pareto-improving. Finally, we consider various insider-trading regulations.

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Additional Information:© 1995 The Review of Financial Studies. The first two authors are grateful to the Social Sciences and Humanities Research Council of Canada for financial support. We also thank the Vancouver Stock Exchange for financial support. We thank Franklin Allen (the editor), an anonymous referee, Jonathan Berk, Bob Dammon, Merwan Engineer, Paul Fischer, Rick Green, Praveen Kumar, Huw Lloyd-Ellis, Ted Neave, Gregor Smith, Chester Spatt, John Spicer, Raman Uppal, participants at the Western Finance Association Meetings, the Canadian Economic Theory conference, the Pacific Northwest Finance conference, and finance seminars at Carnegie Mellon University, Chicago, MIT, and UBC for useful comments. The usual disclaimer applies. Address correspondence to Burton Hollifield, Faculty of Commerce and Business Administration, University of British Columbia, 2053 Main Mall, Vancouver, BC, V6T-1Z2. Formerly SSWP 830.
Funding AgencyGrant Number
Social Sciences and Humanities Research Council (SSHRC)UNSPECIFIED
Vancouver Stock ExchangeUNSPECIFIED
Subject Keywords:Trade, Insider trading, Investors, Liquidity, Financial investments, Market equilibrium, Long term investments, Capital investments, Inside information, Return on investment
Issue or Number:2
Record Number:CaltechAUTHORS:20171108-135327944
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:83071
Deposited By: Jacquelyn Bussone
Deposited On:08 Nov 2017 23:11
Last Modified:15 Nov 2021 19:55

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