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Corporate Financing Decisions and Anonymous Trading

Published online by Cambridge University Press:  06 April 2009

Ronald Giammarino ,
Robert Heinkel  and
Burton Hollifield
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Abstract

This study considers a model in which a corporate manager has private information and engages in i) anonymous trading on personal account in the secondary market, and ii) the corporate issuance of new shares in the primary market. The paper examines the equilibrium tradeoff of insider trading profits against the manager's share of the corporate consequences of the primary issue. In the resulting equilibrium, managers, acting in their own best interests, seem to behave according to differing objective functions. In some cases, they seem to maximize intrinsic value, in others, insider trading profits seem to dominate, and still others seem to be concerned with both. Hence, the presence of anonymous trading around corporate financings brings into question the use of corporate objective functions with exogenously fixed weights.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 29 , Issue 3 , September 1994 , pp. 351 - 377
Copyright
Copyright © School of Business Administration, University of Washington 1994

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