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Investment and insider trading |
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| Authors: | Bernhardt D; Hollifield B; Hughson E |
| Institution: | 1 Queen's University 2 Faculty of Commerce and Business Administration, University of British Columbia, 2053 Main Mall, Vancouver, BC, Canada V6T 1Z2 and Carnegie Mellon University 3 University of British Columbia, Vancouver, Canada and California Institute of Technology, California, USA |
| Abstract: | We study insider trading in a dynamic setting. Rational, butuninformed, traders choose between investment projects withdifferent levels of insider trading. Insider trading distortsinvestment toward asset with less private information. However,when investment is sufficiently information elastic, insidertrading can be welfare-enhancing because of more informativeprices. When insiders repeatedly receive informations, theytrade to reveal it when investment is information elastic becausegood news increases investment and hence future insider profits.Thus, more information is revealed and uninformed agents areexploited less frequently by insiders. Both effects are Pareto-improving.Finally, we consider various insider-trading regulations. |
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