Abstract

http://ssrn.com/abstract=946669
 
 

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Blockholder Trading, Market Efficiency, and Managerial Myopia


Alex Edmans


London Business School - Institute of Finance and Accounting; University of Pennsylvania - The Wharton School; 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

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, 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

Accepted Paper Series


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Date posted: November 22, 2006 ; Last revised: December 7, 2011

Suggested Citation

Edmans, Alex, Blockholder Trading, Market Efficiency, and Managerial Myopia (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. Available at SSRN: http://ssrn.com/abstract=946669

Contact Information

Alex Edmans (Contact Author)
London Business School - Institute of Finance and Accounting ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
University of Pennsylvania - The Wharton School ( email )
3733 Spruce Street
Philadelphia, PA 19104-6374
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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