Insider trading as a vehicle to appropriate rent from R&D

While most insider trading is routine and legal, investors still treat it as new information about the firm's prospects-they assume that trades reflect managers' attempts to profit from their private information. This article explores insider trading as a mechanism to appropriate rent from R&D advances. We analyze stock price reactions to over 134,000 insider-trading events and find that insider purchases generate larger positive stock price reactions for R&D-intensive firms. Investors seem to assume that managers use insider trading to appropriate rent from R&D breakthroughs. We discuss how shareholders may prefer this rent appropriation mechanism over other forms of compensation that directly reduce the firm's income. Copyright (C) 2002 John Wiley Sons, Ltd.