Large Shareholder Trading and Investment Complexity

25 Pages Posted: 26 Jun 2010

See all articles by Eitan Goldman

Eitan Goldman

Indiana University - Kelley School of Business - Department of Finance; European Corporate Governance Institute (ECGI)

Günter Strobl

University of Vienna - Department of Finance

Date Written: June 25, 2010

Abstract

Complex investments are investments that are difficult to value in the short-term. In this paper, we analyze the incentives of a manager who is compensated based on short-term stock prices to invest in complex long-term investments. In particular, we explore how the manager’s investment decision is affected by the presence of a large institutional shareholder whose horizon is finite. The analysis focuses on the observation that the horizon mismatch between the large shareholder and the project can result in a bias in the trading of the institutional investor. The resulting equilibrium is such that investment in long-term complex projects lowers the incentive of institutional investors to collect costly information and hence reduces the informativeness of the short-term stock price. Furthermore, a larger ownership by institutional investors increases their trading bias upward, which in turn induces the firm to invest in more complex projects. Thus, our model suggests that large ownership by institutional investors may actually exacerbate concerns of uninformative stock prices.

Keywords: Large Shareholder, Information Collection, Investment Horizon, Mutual Fund

JEL Classification: G32, D82, G14

Suggested Citation

Goldman, Eitan and Strobl, Günter, Large Shareholder Trading and Investment Complexity (June 25, 2010). Available at SSRN: https://ssrn.com/abstract=1630521 or http://dx.doi.org/10.2139/ssrn.1630521

Eitan Goldman (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-856-0749 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Günter Strobl

University of Vienna - Department of Finance ( email )

Oskar-Morgenstern-Platz 1
Vienna, 1090
Austria

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