Ownership Dynamics and Asset Pricing with a Large Shareholder

Bibliographic Data

ID10183080
AuthorsPeter M Demarzo (Stanford University), Branko Urošević (0000-0002-4605-3090, University of Belgrade)
Year2006
Volume114
Issue4
Pages774-815
Publication date2006-08-01
Peer ReviewedYes
Open AccessNo
TypeARTICLE
VenueJournal of Political Economy (JOURNAL)
Journal identifiersISSN: 0022-3808 • E-ISSN: 1537-534X
PublisherUniversity of Chicago Press (PUBLISHER • US)
DOI10.1086/506334
OpenAlexW2035784843
LanguageEN
Citations received1
References cited31

We analyze the optimal trading and ownership policy of a large shareholder who must trade off diversification and monitoring incentives. Without commitment, the problem is similar to durable goods monopoly: the share price today depends on expected future trades. We show that the large shareholder ultimately trades to the competitive price-taking allocation, even though it entails inefficient monitoring. With continuous trading, the large shareholder trades immediately to this allocation if moral hazard is weak enough that her private valuation of a share is decreasing in her stake. Otherwise, the large shareholder adjusts her stake gradually. We consider implications for asset pricing, IPO underpricing, and lockup provisions

Asset (computer security · Business · Corporate governance · Diversification (marketing strategy · Economics · Financial economics · Incentive · Microeconomics · Monetary economics · Monopoly · Moral hazard · Shareholder · Valuation (finance · Corporate Finance and Governance · Economic theories and models · Finance · Financial Markets and Investment Strategies