Effects of Insider Trading Under Different Market Structures
26 Pages Posted: 24 Jun 1998
Date Written: May 22, 1998
In this paper, we study the relationship between the market structure in the real sector and the effects of insider trading. Specifically, we analyze two models, one in which the insider is a price-choosing monopolist in the real sector and the other in which he is a Cournot duopolist. The aim is to study the effects of different market structures in the real sector on the real and financial effects of insider trading by the manager. We find that the market structure in the real sector matters. When the monopolist insider chooses the price of the real good rather than the output, insider trading increases the price rather than the quantity. When the insider competes with another firm in the real sector, and chooses quantity, the output increases due to insider trading but by less than in monopoly models. In addition, the stock price is more informative than in the monopoly models. Finally, the competition with another firm in the real sector reduces the insider's profits from financial transactions below that in the monopoly models.
JEL Classification: G12, G14
Suggested Citation: Suggested Citation