Cost Information, Insider Trading and Product Market Equilibrium

We study how insider trading based on private cost information affects product market outcomes when firms differ in cost variance. In our model, managers exploit firm-specific cost information to pursue short-term trading gains, leading them to adjust output decisions and reshape product market competition. We show that trading opportunities have heterogeneous effects on firms’ production and value: firms with high cost variance overproduce, whereas those with low cost variance underproduce; correspondingly, the value of firms with high cost variance rises, while that of firms with low cost variance declines. These results demonstrate how heterogeneous costs and private cost information create real economic consequences by linking insider trading incentives to distortions in product market competition and firm value.