A common argument in recent debates on the prosecution of insider trading has been that outsider stay away from markets with inside activity because they perceive that they bear a higher risk that insiders. This paper sets out to formalize the idea of underinvestment ex ante arising through the presence of traders with different quality of information. The basic observation is, that expected insider trading on future secondary markets will shift risk from the asset on prices. In an overlapping generations framework it is shown that future insider trading will lead to higher volatility of prices on secondary markets and thus raise the risk of holding the asset. In principle, this should depress prices ex ante and ultimately new investment. However, insider trading will also create better information in the future about the asset's returns. Future investors then face lower risk and should demand lower risk premia. Future prices should rise accordingly. Ex ante, holding the asset therefore promises higher returns on the one hand and higher risk on the other hand. The overall effect of this trade-off on prices and investment is in general unclear. It is shown that it depends in particular on the way the interaction between new information and gains from trade modelled.
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