INSIDER TRADING AND THE MANAGERIAL CHOICE AMONG RISKY PROJECTS

The concern of this paper is with the effects of insider trading on ex ante managerial behavior. Specifically, the paper focuses on how insi der trading affects insiders' choice among investment projects. Other things equal, insider trading leads insiders to choose riskier investm ent projects, because increased volatility of results enables insiders to make greater trading profits if they learn these results in advanc e of the market. This effect might be beneficial, however, because ins iders' risk aversion pulls them toward a conservative investment polic y. Insiders' choices of projects are identified and compared with insi der trading and those without such trading. Using these results, the c onditions under which insider trading increases or decreases corporate value by affecting the choice of projects with uncertain returns are identified.