Talking Up Liquidity: Insider Trading and Investor Relations

45 Pages Posted: 4 Dec 2002

See all articles by Ming Huang

Ming Huang

Cornell University - Samuel Curtis Johnson Graduate School of Management

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 20, 2002

Abstract

Managements ("insiders") of many corporations, especially small or newly public firms, invest considerable resources in investor relations such as voluntary disclosures and courting analyst coverage. We develop a model to explore the role of such costly investments and the incentives of insiders to undertake them. In contrast to existing theories, we point out that insiders may undertake such investments not necessarily to improve the share price, but to enhance the liquidity of their block of shares in case they have to sell their equity stakes for liquidity reasons. This leads to a divergence of interest between insiders and dispersed outside shareholders regarding investor relations. The costs of investor relations are paid by all shareholders, though dispersed shareholders care little about market liquidity because of their small holdings. Our model predicts that the demographics of insiders (e.g. liquidity needs, size of equity stakes) are determinants of the extent of investor relations across firms.

Suggested Citation

Huang, Ming and Hong, Harrison G., Talking Up Liquidity: Insider Trading and Investor Relations (October 20, 2002). AFA 2003 Washington, DC Meetings, Available at SSRN: https://ssrn.com/abstract=354383 or http://dx.doi.org/10.2139/ssrn.354383

Ming Huang

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-225-9594 (Phone)

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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