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Contractual restrictions on insider trading: a welfare analysis

Author

Listed:
  • Antonio E. Bernardo

    (Anderson Graduate School of Management, U.C.L.A. 110 Westwood Plaza Box 951481, Los Angeles, CA 90095-1481, USA)

Abstract

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.

Suggested Citation

  • Antonio E. Bernardo, 2001. "Contractual restrictions on insider trading: a welfare analysis," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(1), pages 7-35.
    • Handle: RePEc:spr:joecth:v:18:y:2001:i:1:p:7-35
    Note: Received: September 23, 2000; revised version: December 12, 2000
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    Citations

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    Cited by:

    1. Akram Khalilov & Beatriz Garcia Osma, 2020. "Accounting conservatism and the profitability of corporate insiders," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(3-4), pages 333-364, March.
    2. Robert McGee, 2008. "Applying Ethics to Insider Trading," Journal of Business Ethics, Springer, vol. 77(2), pages 205-217, January.
    3. Robert McGee, 2010. "Analyzing Insider Trading from the Perspectives of Utilitarian Ethics and Rights Theory," Journal of Business Ethics, Springer, vol. 91(1), pages 65-82, January.

    More about this item

    Keywords

    Insider trading; Rational expectations equilibrium; Asymmetric information; Contracts; Investment policy.;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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