Information Production, Insider Trading, and the Role of Managerial Compensation

We analyze the information production decision of a manager who can trade on this information and whose compensation is increasing in the stock price. The amount of information produced increases with the stock's volatility and liquidity and decreases with the manager's pay-performance sensitivity. Insider trading regulations that symmetrically inhibit the manager's ability to buy and sell stock cause her to produce less information. But asymmetric insider trading regulations like the short sales prohibition have an ambiguous effect inducing her to produce more or less information depending on her pay-performance sensitivity. This contradicts the standard argument made by opponents of insider trading regulations that such regulations always reduce information production.