Does Inside Trading Affect Managers’ Decision-Making? A Theoretical Investigation

Ning Cao¹, Shanmin Li^1*, Yong Li²

¹School of Business, Sun Yat-Sen University, Guangzhou, China.
²Hanqing Advanced Institute of Economics and Finance, Renmin University of China, Beijing, China.

DOI: 10.4236/jmf.2015.54030                

Abstract

This paper analyzes how inside trading affects managers’ decision-making and also examines the effect of the social relations on managers. Through model analysis, the paper shows that inside trading does affect managers’ behavior. Inside trading lowers the managers’ minimum requirements for risky projects and thus has a risk-reduction effect on managers. In some cases, the existence of inside trading makes managers select projects with negative returns, which results in agency problems. When managers try to consolidate their social networks by divulging inside information, agency problems are exacerbated. This paper also analyzes the degree of risk aversion. As the degree of a manager’s risk aversion increases, the risk-reduction effect of inside trading is reduced.

Keywords

Insider Trading, Risk Aversion, Agency Problem

Conflicts of Interest

The authors declare no conflicts of interest.

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