The Effect of Insider Trading on Insiders' Reaction to Opportunities to "Waste" Corporate Value

32 Pages Posted: 7 Jul 2004

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Chaim Fershtman

Tel Aviv University - Eitan Berglas School of Economics; Tinbergen Institute

Date Written: February 1991

Abstract

This paper analyzes certain effects of insider trading on the principal-agent problem in corporations. Specifically, we focus on those managerial choices that confront managers with the need to decide between options that produce different corporate value but do not differ in the managerial effort involved. In the absence of insider trading, and as long as managers' salaries are positively correlated with their firms results, managers will make such choices efficiently, and consequently such choices have previously received little attention, we show that, in the presence of insider trading, managers may make such choices inefficiently. With such trading, managers night elect to have a lower corporate value -- that is, they may 'waste' corporate value -- because having such a value might enable them to make greeter trading profits. We analyze the conditions under which the problem we identify is likely to arise and the factors that determine its severity. We also identify those restrictions en insider trading that can eliminate this problem.

Suggested Citation

Bebchuk, Lucian A. and Fershtman, Chaim, The Effect of Insider Trading on Insiders' Reaction to Opportunities to "Waste" Corporate Value (February 1991). NBER Working Paper No. t0095. Available at SSRN: https://ssrn.com/abstract=290163

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

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HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

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National Bureau of Economic Research (NBER) ( email )

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Chaim Fershtman

Tel Aviv University - Eitan Berglas School of Economics ( email )

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Israel
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+972 3 640 9908 (Fax)

Tinbergen Institute ( email )

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Netherlands

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