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Some Remarks on Leland's Model of Insider Trading
Author(s) -
Repullo Rafael
Publication year - 1999
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/1468-0335.00175
Subject(s) - insider trading , insider , robustness (evolution) , business , investment (military) , financial economics , stock market , economics , monetary economics , finance , law , paleontology , biochemistry , chemistry , horse , politics , biology , political science , gene
This paper shows that Leland's (1992) results on the positive effects of insider trading on investment are not robust to the introduction of noise in the insider’s information. The paper then considers two variations of his model in which the insider is risk neutral (to ensure robustness), and the investment decision is prior to the placing of the stock in the market. It is shown that if insider trading takes place in the primary market, it has no effect on the level of investment, whereas if it takes place in the secondary market, it has a negative effect on investment.