Excess Returns of Companies with a Distinguished Player
41 Pages Posted: 8 Sep 2008 Last revised: 6 Apr 2009
Date Written: March 4, 2009
Arbitrage-free asset pricing theory suggests that equilibrium price and equilibrium value of a firm coincide and correctly anticipate the equilibrium effort of a value-enhancing manager, called the distinguished player. This article shows that in equilibrium investors trade shares of such a firm at a discount below equilibrium value and buyers earn excess returns on their investment if the distinguished player can trade anonymously. The resulting prediction that investment in companies with a distinguished player yields excess returns was confirmed by empirical evidence in von Lilienfeld-Toal and Runzi (2007) who report positive abnormal returns for owner-manager firms taken from S&P500 and S&P1500 firms.
Keywords: excess returns, underpricing, no-arbitrage, asset pricing, corporate finance
JEL Classification: G12, G32, C72, D43, D46
Suggested Citation: Suggested Citation