||Journal of business finance and accounting
, v. 28, (1-2), 2001, Jan.-Mar. , p. 35-62
||This paper shows that managerial insider trading, with suitable regulations, mitigates the problem of information asymmetry and subsequently helps shareholders (or the board) to exert better control over corporate decisions. In a setting where the manager of a firm has private information about a potential investment project and his personal preference for investment differs from those of shareholders, I demonstrate the existence of a unique perfect-sequential equilibrium, in the spirit of 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 the investment proposal based on the revealed information. However, for insider trading to be a credible signalling device, restrictions must be imposed that require the insider to publicly report his trading activity and prohibit him from making short-term reversals of his trading position. On the other hand, the insider may be allowed to make a profit from his trading.
||This is an electronic version of an article published in Journal of business finance & accounting ©  [copyright owner as specified in the journal]
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