Regulated Managerial Insider Trading as a Mechanism to Facilitate Shareholder Control

Guochang Zhang

Journal of Business Finance & Accounting, 2001, vol. 28, issue 1‐2, 35-62

Abstract: This paper shows that managerial insider trading, suitably regulated, reduces information asymmetry and helps shareholders better screen corporate decisions. In a setting where a firm's manager has private information about potential projects and his preferences differ from those of shareholders, I derive a unique perfect‐sequential equilibrium (Grossman and Perry, 1986) where the manager's inside information is partially revealed through his voluntary purchase of the firm's stock, and shareholders screen investment proposals based on the revealed information. However, to make information revelation credible, the manager should be required to report his trading publicly and be prohibited from making a short‐term reversal of his position.

Date: 2001
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