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
Bibliographical notePublished online: 2. Marts 2021.
- Insider trading
- Real activities manipulation
- Product market competition