Contractual restrictions on insider trading: a welfare analysis |
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Authors: | Antonio E. Bernardo |
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Affiliation: | (1) Anderson Graduate School of Management, U.C.L.A. 110 Westwood Plaza Box 951481, Los Angeles, CA 90095-1481, USA (e-mail: abernard@anderson.ucla.edu) , US |
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Abstract: | Summary. This paper analyzes the welfare effects of permitting firms to negotiate contractually the right to allow corporate insiders to trade shares in the firm on private information. A computational framework is employed to (i) analyze formally the effects of insider trading on managerial investment choice, the informational efficiency of stock prices, and the welfare of all investor types; and (ii) examine the effectiveness of various compensation schemes (such as stock and insider trading rights) to mitigate conflicts of interest between managers and shareholders. I show that shareholders will typically choose not to grant insider trading rights to managers. This decision is socially optimal. Received: September 23, 2000; revised version: December 12, 2000 |
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Keywords: | and Phrases: Insider trading Rational expectations equilibrium Asymmetric information Contracts Investment policy. |
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