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Public trading and private incentives

Subject

Finance

Publishing details

Authors / Editors

Gromb D;Faure-Grimaud A

Publication Year

2001

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 incentive 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 are derived for the decision to go public, capital structure, and security design.

Publication Research Centre

Institute of Finance and Accounting

Series Number

FIN 341

Series

IFA Working Paper

Available on ECCH

No


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