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.
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