Insider trading, market response and real investment of the firm

This dissertation investigates whether the market itself has mechanisms to reduce the potential harm of insider trading on real investment; more specifically, do investment opportunities and the need for external funding these make it possible to attenuate the fear of investors that they are being taken advantage of by insiders.;We hypothesize that in fast growing firms with greater investment opportunities and a need for external funding, insiders have stronger incentives to abstain from taking advantage of uninformed outside investors in equity trading and that outside investors take such incentives into account.;We find (1) that the drop in stock prices that accompanied insider selling is smaller in firms with greater investment growth prospects, and (2) that insider buying is followed by a greater rise in stock prices in such firms. In firms with higher sales growth prospects, which we adopt as a measure of future cash flow prospects, we find (3) that insider selling is accompanied by a greater fall in stock prices, whereas insider buying is followed by a smaller rise in stock prices.