Working Paper: CEPR ID: DP2505
Authors: Antoine Faure-Grimaud; Denis Gromb
Abstract: This paper studies the link between public trading and the activity of a firm's large shareholder who can affect firm value. Public trading results in the formation of a stock price that is informative about the large shareholder's activity. This increases the latter's incentives to engage in value increasing activities. Indeed, if he has to liquidate part of his stake before the effect of his activity is publicly observed, a more informative price rewards him for his activity. Implications of this perspective are derived for the decision to go public and security design.
Keywords: blockholder incentives; public trading; stock price information
JEL Codes: G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| public trading (G10) | stock price formation (G10) |
| stock price formation (G10) | large shareholder incentives (G34) |
| public trading (G10) | large shareholder incentives (G34) |
| dispersed shareholder trading (G34) | large shareholder incentives (G34) |
| ownership concentration (G32) | stock price informativeness (G14) |
| liquidity shocks (E44) | going public (L32) |
| optimal design of securities (G12) | balance of insider and outsider claims (O36) |