Insider Trading and Financing Constraints

Ataullah, Ali; Goergen, Marc and Le, Hang (2014). Insider Trading and Financing Constraints. Financial Review, 49(4) pp. 685–712.

DOI: https://doi.org/10.1111/fire.12053

Abstract

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.