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Blockholder trading, market efficiency and managerial myopia

Journal

Journal of Finance

Subject

Finance

Publishing details

Journal of Finance 2009 December Vol 64:6 p 2481-2513

Authors / Editors

Edmans A

Biographies

Alex Edmans

Publication Year

2009

Abstract

This paper analyzes how blockholders can exert governance even if they cannot intervene in a firm's operations. Blockholders have strong incentives to monitor the firm's fundamental value because they can sell their stakes upon negative information. By trading on private information (following the “Wall Street Rule”), they cause prices to reflect fundamental value rather than current earnings. This in turn encourages managers to invest for long-run growth rather than short-term profits. Contrary to the view that the U.S.'s liquid markets and transient shareholders exacerbate myopia, I show that they can encourage investment by impounding its effects into prices.

Publication Research Centre

Institute of Finance and Accounting

Available on ECCH

No


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