Insider Trading and Financing Constraints

Insider Trading and Financing Constraints

Ali Ataullah, Marc Goergen, Hang Le

Series number :

Serial Number: 
363/2013

Date posted :

June 01 2013

Last revised :

June 14 2013
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Keywords

  • insider trading • 
  • Investment-cash flow sensitivity • 
  • financing constraints • 
  • information hierarchy hypothesis
Insider trading may alleviate financing constraints by conveying value-relevant information to the market (the information effect) or may exacerbate financing constraints by impairing market liquidity and distorting insiders? incentives to disclose value-relevant information (the confidence effect).
We examine the significance of these two contrasting effects by investigating the link between insider trading and financing constraints as measured by the investment-cash flow sensitivity. We find that, overall insider trading exacerbates financing constraints; however the information effect dominates the confidence effect for insider purchases. Only trades by executive directors are significantly related to financing constraints.

Authors

Real name: 
Ali Ataullah
Real name: 
Hang Le