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Insider Trading with Product DifferentiationWassim DaherGulf University for Science and Technology (GUST) Harun AydilekGulf University for Science and Technology (GUST) Fida KaramGulf University for Science and Technology (GUST) Asiye AydilekGulf University for Science and Technology (GUST) March 5, 2012 Abstract: In this paper, we analyze the effect of Cournot competition with differentiated products on the real and financial decisions of a publicly-owned firm, with three different structures in the financial market: monopoly, duopoly and Stackelberg. We show that the degree of product differentiation does not affect the results found in the literature on insider trading, concerning the effect of the financial market structure on firms' outputs, the revelation of information and the insiders' orders. Besides, firms' output, the amount of information revealed in the stock price, the insiders' trading orders and the owners' profits are independent of the degree of product differentiation. The real market structure through the degree of product differentiation is found to determine the level of the compensation scheme earned by the manager, the market makers' response to the total order flow signal as well as the managers' profits.
Number of Pages in PDF File: 31 Keywords: Insider trading, Product differentiation, Market structure, Correlated signals, Kyle model JEL Classification: G14, D82 working papers seriesDate posted: March 28, 2012Suggested CitationContact Information
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