Blockholder Trading, Market Efficiency, and Managerial Myopia
London Business School - Institute of Finance and Accounting; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)
August 4, 2011
Journal of Finance, Vol. 64, No. 6, pp. 2481-2513
U of Penn, Inst for Law & Econ Research Paper No. 08-08
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, since 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.
Number of Pages in PDF File: 35
Keywords: Blockholders, market efficiency, myopia, short-termism, intangible investment, Wall Street Rule, voting with your feet
JEL Classification: D82, G14, G32
Date posted: November 22, 2006 ; Last revised: December 7, 2011
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