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Insider Trading in Financial Signaling Models
Author(s) -
BAGNOLI MARK,
KHANVEEN
Publication year - 1992
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1992.tb04688.x
Subject(s) - insider , compensation (psychology) , insider trading , private information retrieval , business , microeconomics , turnover , action (physics) , information asymmetry , contrast (vision) , finance , industrial organization , economics , computer science , management , psychology , physics , computer security , quantum mechanics , artificial intelligence , political science , psychoanalysis , law
We study the impact of voluntary trade by the manager. We find that, in contrast to standard signaling models, an action is good news for some firms and bad news for others, depending on observable characteristics of the firm, its managers, and their compensation plans. Further, voluntary trade eliminates separating equilibria and thus the possibility of exactly inferring the manager's private information. This may cause the manager to take inefficient actions so as to earn trading profits. Such undesirable behavior can be more effectively constrained by compensation contracts based on phantom shares or nontradeable options instead of large stockholdings.