Insider Trading as a Vehicle to Appropriate Rent from R&D

Strategic Management Journal (24), 183-190, 2003

8 Pages Posted: 20 Jan 2004 Last revised: 27 Jul 2012

See all articles by Russell Wayne Coff

Russell Wayne Coff

University of Wisconsin - Madison - School of Business

Peggy M. Lee

Arizona State University (ASU) - Management Department

Date Written: July 26, 2012

Abstract

Most insider trading is routine and not subject to prosecution or enforcement. Still, investors typically treat it as a signal about the firm's prospects. In other words, they act as though the trades reflect managers' attempts to profit from their private inside information. This article examines insider trading as a mechanism to appropriate rent from R&D breakthroughs. We analyze abnormal returns in stock prices in response to over 134,000 insider-trading events and find that insider purchases generate larger positive stock price reactions for R&D intensive firms. Investors act as though they assume that managers use insider trading to appropriate rent from R&D productivity. We briefly discuss how shareholders may actually prefer this rent appropriation mechanism over other forms of compensation that directly reduce a firm's income.

Note: This is a description of the paper and not the actual abstract.

Keywords: Knowledge, Insider trading, Rent appropriation, Competitive advantage

JEL Classification: G32, J32, K22, L100

Suggested Citation

Coff, Russell Wayne and Lee, Peggy M., Insider Trading as a Vehicle to Appropriate Rent from R&D (July 26, 2012). Strategic Management Journal (24), 183-190, 2003. Available at SSRN: https://ssrn.com/abstract=311539

Russell Wayne Coff (Contact Author)

University of Wisconsin - Madison - School of Business ( email )

975 University Avenue
Madison, WI 53706
United States

Peggy M. Lee

Arizona State University (ASU) - Management Department ( email )

Tempe, AZ 85287-4006
United States

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