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Regulated Managerial Insider Trading as a Mechanism to Facilitate Shareholder Control

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  • Guochang Zhang

Abstract

This paper shows that managerial insider trading, suitably regulated, reduces information asymmetry and helps shareholders better screen corporate decisions. In a setting where a firm's manager has private information about potential projects and his preferences differ from those of shareholders, I derive a unique perfect‐sequential equilibrium (Grossman and Perry, 1986) where the manager's inside information is partially revealed through his voluntary purchase of the firm's stock, and shareholders screen investment proposals based on the revealed information. However, to make information revelation credible, the manager should be required to report his trading publicly and be prohibited from making a short‐term reversal of his position.

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  • Guochang Zhang, 2001. "Regulated Managerial Insider Trading as a Mechanism to Facilitate Shareholder Control," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(1‐2), pages 35-62, January.
    • Handle: RePEc:bla:jbfnac:v:28:y:2001:i:1-2:p:35-62
    DOI: 10.1111/1468-5957.00365
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    Cited by:

    1. Julia Sawicki & Keshab Shrestha, 2014. "Misvaluation and Insider Trading Incentives for Accrual-based and Real Earnings Management," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(7-8), pages 926-949, September.
    2. P. J. Engelen & L. Liedekerke, 2006. "An Ethical Analysis of Regulating Insider Trading," Working Papers 06-05, Utrecht School of Economics.
    3. Alan D. Morrison, 2004. "Competition and Information Production in Market Maker Models," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(7‐8), pages 1171-1190, September.
    4. Alan D. Morrison, 2004. "Competition and Information Production in Market Maker Models," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(7-8), pages 1171-1190.
    5. André Betzer & Erik Theissen, 2010. "Sooner or Later: An Analysis of the Delays in Insider Trading Reporting," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(1‐2), pages 130-147, January.

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