Working Paper: NBER ID: w11367
Authors: Harrison Hong; Jose Scheinkman; Wei Xiong
Abstract: We model the relationship between asset float (tradeable shares) and speculative bubbles. Investors trade a stock with limited float because of insider lock-ups. They have heterogeneous beliefs due to overconfidence and face short-sales constraints. A bubble arises as price overweighs optimists' beliefs and investors anticipate the option to resell to those with even higher valuations. The bubble's size depends on float as investors anticipate an increase in float with lock-up expirations and speculate over the degree of insider selling. Consistent with the internet experience, the bubble, turnover and volatility decrease with float and prices drop on the lock-up expiration date.
Keywords: asset float; speculative bubbles; insider trading; overconfidence; shortsale constraints
JEL Codes: G0; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| asset float (G12) | size of speculative bubble (E32) |
| size of speculative bubble (E32) | stock prices (G12) |
| asset float (G12) | share turnover (D16) |
| asset float (G12) | return volatility (G17) |
| lockup expiration date (Y60) | stock prices (G12) |
| insider selling (G14) | stock prices (G12) |