Premium
Insider Trading and Financing Constraints
Author(s) -
Ataullah Ali,
Goergen Marc,
Le Hang
Publication year - 2014
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12053
Subject(s) - insider trading , cash flow , insider , incentive , market liquidity , business , finance , value (mathematics) , cash , investment (military) , monetary economics , economics , microeconomics , machine learning , politics , political science , computer science , law
Insider trading may alleviate financing constraints by conveying value‐relevant information to the market (the information effect) or may exacerbate financing constraints by impairing market liquidity and distorting insiders’ incentives to disclose value‐relevant information (the confidence effect). We examine the significance of these two contrasting effects by investigating the link between insider trading and financing constraints as measured by the investment‐cash flow sensitivity. We find that, overall insider trading exacerbates financing constraints; however the information effect dominates the confidence effect for insider purchases. Only trades by executive directors are significantly related to financing constraints.