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Insider Trading, Competition, and Real Activities Manipulation

Author

Listed:
  • Hui Chen

    (Department of Business Administration, University of Zurich, CH-8032 Zurich, Switzerland)

  • Bjorn N. Jorgensen

    (Department of Accounting, Copenhagen Business School, DK-2000 Frederiksberg, Denmark)

Abstract

We consider a setting where managers manipulate the firms’ real activities in anticipation of insider trading opportunities. Managers choose strictly higher production quantities than the quantities chosen absent insider trading, implying lower firm profit but higher consumer surplus. Through comparative statics, we show the overproduction is mitigated by the degree of competition in the industry, the manager’s current equity stake in the firm, and the precision of cost information. We also analyze the effects of insider trading in several extensions including asymmetric ownership structure, potential horizontal merger, and common market maker.

Suggested Citation

  • Hui Chen & Bjorn N. Jorgensen, 2022. "Insider Trading, Competition, and Real Activities Manipulation," Management Science, INFORMS, vol. 68(2), pages 1497-1511, February.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:2:p:1497-1511
    DOI: 10.1287/mnsc.2020.3915
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    References listed on IDEAS

    as
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