Does Insider Trading Always Increase Financial Friction? A Model of Equity Market with Information Asymmetry

Abstract

This paper explores the interaction between insider trading and seasoned equity offering in the context of Myers and Majluf (1984). Private information conveyed through trading activities may mitigate information asymmetry and improve capital market efficiency. Moreover, an insider has less incentive to hide information from the market as it may be revealed through the firm's financing decision.

Keywords: Insider Trading, Equity Financing, Adverse Selection, Price Informativeness

JEL Classification: D4, D8, G1, G3