Contractual restrictions on insider trading: a welfare analysis

Antonio E. Bernardo ()
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Antonio E. Bernardo: Anderson Graduate School of Management, U.C.L.A. 110 Westwood Plaza Box 951481, Los Angeles, CA 90095-1481, USA

Economic Theory, 2001, vol. 18, issue 1, pages 7-35

Abstract: This paper analyzes the welfare effects of permitting firms to negotiate contractually the right to allow corporate insiders to trade shares in the firm on private information. A computational framework is employed to (i) analyze formally the effects of insider trading on managerial investment choice, the informational efficiency of stock prices, and the welfare of all investor types; and (ii) examine the effectiveness of various compensation schemes (such as stock and insider trading rights) to mitigate conflicts of interest between managers and shareholders. I show that shareholders will typically choose not to grant insider trading rights to managers. This decision is socially optimal.

Keywords: Insider trading; Rational expectations equilibrium; Asymmetric information; Contracts; Investment policy. (search for similar items in EconPapers)
JEL-codes: C63 D82 G10 G18 (search for similar items in EconPapers)
Date: 2001-04-11
Note: Received: September 23, 2000; revised version: December 12, 2000
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