Information asymmetry, R&D, and insider gains

Although researchers have documented gains from insider trading, the source s of private information leading to information asymmetry and insider gains have not been comprehensively investigated. We focus on research and devel opment (R&D)-an increasingly important yet poorly disclosed productive inpu t-as a potential source of insider gains. Our findings, for the period from 1985 to 1997 indicate that insider gains in R&D-intensive firms are substa ntially larger than insider gains in firms without R&D. Insiders also take advantage of information on planned changes in R&D budgets. R&D is thus a m ajor contributor to information asymmetry and insider gains, raising issues concerning management compensation, incentives, and disclosure policies.