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Insider Trading in Financial Signaling Models

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  • Bagnoli, Mark
  • Khanna, Naveen

Abstract

The authors study the impact of voluntary trade by the manager. They find that, in contrast to standard signaling models, an action is good news for some firms and bad news for others, depending on observable characteristics of the firm, its managers, and their compensation plans. Further, voluntary trade eliminates separating equilibria and, thus, the possibility of exactly inferring the manager's private information. This may cause the manager to take inefficient actions so as to earn trading profits. Such undesirable behavior can be more effectively constrained by compensation contracts based on phantom shares or nontradeable options instead of large stockholdings. Copyright 1992 by American Finance Association.

Suggested Citation

  • Bagnoli, Mark & Khanna, Naveen, 1992. "Insider Trading in Financial Signaling Models," Journal of Finance, American Finance Association, vol. 47(5), pages 1905-1934, December.
    • Handle: RePEc:bla:jfinan:v:47:y:1992:i:5:p:1905-34
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    Cited by:

    1. Sylvain Friederich & Alan Gregory & John Matatko & Ian Tonks, 1999. "Stock Price Patterns around the Trades of Corporate Insiders on the London Stock Exchange," Post-Print halshs-03620363, HAL.
    2. Friederich, Sylvain & Gregory, Alan & Matako, John & Tonks, Ian, 1999. "Stock price patterns around the trades of corporate insiders on the London Stock Exchange," LSE Research Online Documents on Economics 119116, London School of Economics and Political Science, LSE Library.
    3. Martyna Kobus & Michał Krawczyk, 2013. "Piracy as an ethical decision," Working Papers 2013-22, Faculty of Economic Sciences, University of Warsaw.
    4. John Matatko & Alan Gregory & Ian Tonks & Sylvain Friederich, 1999. "Stock Price Around the Trades of Corporate Insider on the London Stock Exchange," FMG Discussion Papers dp332, Financial Markets Group.
    5. Denis, David J. & Xu, Jin, 2013. "Insider trading restrictions and top executive compensation," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 91-112.
    6. Jasmine Yur‐Austin, 1998. "Can insiders bail themselves out before private renegotiation?," Review of Financial Economics, John Wiley & Sons, vol. 7(2), pages 197-211.
    7. Shams, Syed M.M. & Duong, Huu Nhan & Singh, Harminder, 2016. "Information content of directors' trading around acquisitions," Pacific-Basin Finance Journal, Elsevier, vol. 38(C), pages 177-193.
    8. Baiman, Stanley & Verrecchia, Robert E., 1995. "Earnings and price-based compensation contracts in the presence of discretionary trading and incomplete contracting," Journal of Accounting and Economics, Elsevier, vol. 20(1), pages 93-121, July.
    9. Yur-Austin, Jasmine, 1998. "Can insiders bail themselves out before private renegotiation?," Review of Financial Economics, Elsevier, vol. 7(2), pages 197-211.

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