Information-Hedging Disclosures and Insider Trading

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

I model the effect of disclosure on the tradeoff between information risk, liquidity risk, and price risk for a well-informed, risk-averse insider. Revealing some information before trading decreases the variability of the insider's information advantage and thus reduces his information risk. Disclosure also lowers adverse selection costs for market makers, which reduces the insider's liquidity risk by increasing his trading flexibility. However, disclosure increases price risk for the insider because the price fully reflects the revealed information. The reduction in information and liquidity risks outweigh the rise in price risk when the insider is less risk averse because a less risk-averse insider's information-based motive for trading is stronger than his hedging motive. The opposite relation holds when the insider is more risk averse. Therefore, a less (more) risk-averse insider experiences an increase (decrease) in welfare when he discloses some information before trading. Cost of capital and policy implications are identified.

Original languageEnglish (US)
Pages (from-to)1280-1296
Number of pages17
JournalJournal of Business Finance and Accounting
Volume43
Issue number9-10
DOIs
StatePublished - Oct 1 2016

Fingerprint

Insider trading
Hedging
Insider
Disclosure
Risk-averse
Information risk
Liquidity risk
Price risk
Adverse selection costs
Trade-offs
Information advantage
Policy implications
Cost of capital
Market makers

All Science Journal Classification (ASJC) codes

  • Accounting
  • Business, Management and Accounting (miscellaneous)
  • Finance

Cite this

@article{8aac3c788a8e436e816d3993d3ac2f49,
title = "Information-Hedging Disclosures and Insider Trading",
abstract = "I model the effect of disclosure on the tradeoff between information risk, liquidity risk, and price risk for a well-informed, risk-averse insider. Revealing some information before trading decreases the variability of the insider's information advantage and thus reduces his information risk. Disclosure also lowers adverse selection costs for market makers, which reduces the insider's liquidity risk by increasing his trading flexibility. However, disclosure increases price risk for the insider because the price fully reflects the revealed information. The reduction in information and liquidity risks outweigh the rise in price risk when the insider is less risk averse because a less risk-averse insider's information-based motive for trading is stronger than his hedging motive. The opposite relation holds when the insider is more risk averse. Therefore, a less (more) risk-averse insider experiences an increase (decrease) in welfare when he discloses some information before trading. Cost of capital and policy implications are identified.",
author = "Lenkey, {Stephen L.}",
year = "2016",
month = "10",
day = "1",
doi = "10.1111/jbfa.12224",
language = "English (US)",
volume = "43",
pages = "1280--1296",
journal = "Journal of Business Finance and Accounting",
issn = "0306-686X",
publisher = "Wiley-Blackwell",
number = "9-10",

}

Information-Hedging Disclosures and Insider Trading. / Lenkey, Stephen L.

In: Journal of Business Finance and Accounting, Vol. 43, No. 9-10, 01.10.2016, p. 1280-1296.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Information-Hedging Disclosures and Insider Trading

AU - Lenkey, Stephen L.

PY - 2016/10/1

Y1 - 2016/10/1

N2 - I model the effect of disclosure on the tradeoff between information risk, liquidity risk, and price risk for a well-informed, risk-averse insider. Revealing some information before trading decreases the variability of the insider's information advantage and thus reduces his information risk. Disclosure also lowers adverse selection costs for market makers, which reduces the insider's liquidity risk by increasing his trading flexibility. However, disclosure increases price risk for the insider because the price fully reflects the revealed information. The reduction in information and liquidity risks outweigh the rise in price risk when the insider is less risk averse because a less risk-averse insider's information-based motive for trading is stronger than his hedging motive. The opposite relation holds when the insider is more risk averse. Therefore, a less (more) risk-averse insider experiences an increase (decrease) in welfare when he discloses some information before trading. Cost of capital and policy implications are identified.

AB - I model the effect of disclosure on the tradeoff between information risk, liquidity risk, and price risk for a well-informed, risk-averse insider. Revealing some information before trading decreases the variability of the insider's information advantage and thus reduces his information risk. Disclosure also lowers adverse selection costs for market makers, which reduces the insider's liquidity risk by increasing his trading flexibility. However, disclosure increases price risk for the insider because the price fully reflects the revealed information. The reduction in information and liquidity risks outweigh the rise in price risk when the insider is less risk averse because a less risk-averse insider's information-based motive for trading is stronger than his hedging motive. The opposite relation holds when the insider is more risk averse. Therefore, a less (more) risk-averse insider experiences an increase (decrease) in welfare when he discloses some information before trading. Cost of capital and policy implications are identified.

UR - http://www.scopus.com/inward/record.url?scp=84994448770&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84994448770&partnerID=8YFLogxK

U2 - 10.1111/jbfa.12224

DO - 10.1111/jbfa.12224

M3 - Article

AN - SCOPUS:84994448770

VL - 43

SP - 1280

EP - 1296

JO - Journal of Business Finance and Accounting

JF - Journal of Business Finance and Accounting

SN - 0306-686X

IS - 9-10

ER -