TY  - JOUR
AU  - Bebchuk,Lucian Arye
AU  - Fershtman,Chaim
TI  - The Effects of Insider Trading on Insiders' Choice Among Risky          Investment Projects
JF  - National Bureau of Economic Research Technical Working Paper Series
VL  - No. 96
PY  - 1991
Y2  - February 1991
UR  - http://www.nber.org/papers/t0096
L1  - http://www.nber.org/papers/t0096.pdf
N1  - Author contact info:
Lucian A. Bebchuk
Harvard Law School
1545 Massachusetts Avenue
Cambridge, MA 02138
Tel: 617/495-3138
Fax: 617/812-0554
E-Mail: bebchuk@law.harvard.edu
AB  - This paper studies certain effects of insider trading on the principal-agent problem in corporations. Specifically, we focus on insiders' choice among investment projects. Other things equal, insider trading leads insiders to choose riskier investment projects, because increased volatility of results enables insiders to make greater trading profits if they learn these results in advance of the market. This effect might or might not be beneficial, however, because insiders' risk-aversion pulls them toward a conservative investment policy. We identify and compare insiders' choices of projects with insider trading and those without such trading. We also study the optimal contract design with insider trading and without such trading, thus identifying the effects that allowing such trading has on other elements of insiders' compensation. Using these results, we identify the conditions under which insider trading increases or decreases corporate value by affecting the choice of projects with uncertain returns .
ER  -