Insider Trading, Competition, and Real Activities Manipulation

Hui Chen*, Bjørn N. Jørgensen*

*Corresponding author for this work

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Abstract

We consider a setting where managers manipulate the firms’ real activities in anticipation of insider trading opportunities. Managers choose strictly higher production quantities than the quantities chosen absent insider trading, implying lower firm profit but higher consumer surplus. Through comparative statics, we show the overproduction is mitigated by the degree of competition in the industry, the manager’s current equity stake in the firm, and the precision of cost information. We also analyze the effects of insider trading in several extensions including asymmetric ownership structure, potential horizontal merger, and common market maker
Original languageEnglish
JournalManagement Science
Volume68
Issue number2
Pages (from-to)1497-1511
Number of pages15
ISSN0025-1909
DOIs
Publication statusPublished - Feb 2022

Bibliographical note

Published online: 2. Marts 2021.

Keywords

  • Insider trading
  • Real activities manipulation
  • Overproduction
  • Product market competition

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