What Can We Learn from Stock Prices? Cash Flow, Risk and Shareholder Welfare
Journal of Institutional and Theoretical Economics (conference issue, 2019 Forthcoming)
20 Pages Posted: 10 Dec 2018
Date Written: November 16, 2018
Price is expected cash flows discounted at the risk-free rate and a discount for risk exposure. Price-equivalency does not always imply welfare-equivalency: shareholders are not necessarily indifferent between a price increase of $1 from higher cash flows and the same $1 increase from lower risk exposure. Even in complete markets, if managers enjoy private benefits of control, the social planner may prefer lower risk exposure to a price-equivalent increase in firm value from greater investor protection. This has implications for event studies, the tradeoff between principal costs and agency costs, and the link between macroeconomic risk and corporate governance.
Keywords: securities law, firm value, asset prices, shareholder welfare
JEL Classification: D53, G12, G34, K22
Suggested Citation: Suggested Citation