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Insider trading as a vehicle to appropriate rent from R&D
Author(s) -
Coff Russell W.,
Lee Peggy M.
Publication year - 2003
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.270
Subject(s) - insider trading , insider , shareholder , business , appropriation , private information retrieval , profit (economics) , stock (firearms) , microeconomics , economics , monetary economics , financial economics , finance , corporate governance , law , mechanical engineering , linguistics , philosophy , statistics , mathematics , political science , engineering
While most insider trading is routine and legal, investors still treat it as new information about the firm's prospects—they assume that trades reflect managers' attempts to profit from their private information. This article explores insider trading as a mechanism to appropriate rent from R&D advances. We analyze stock price reactions to over 134,000 insider‐trading events and find that insider purchases generate larger positive stock price reactions for R&D‐intensive firms. Investors seem to assume that managers use insider trading to appropriate rent from R&D breakthroughs. We discuss how shareholders may prefer this rent appropriation mechanism over other forms of compensation that directly reduce the firm's income. Copyright © 2002 John Wiley & Sons, Ltd.