Ownership Structure, Speculation, and Shareholder Intervention
Finance Department Working Paper No. 220
Posted: 15 Jan 1997
Date Written: October 1996
An institution that gathers information about a firm whose shares it holds can use this information for two purposes: speculation, and costly intervention aimed at improving the firm's performance. Its incentive to intervene has two components: the direct impact on its existing position, and the trading impact from buying more shares in advance of intervening rather than not intervening and selling shares. The trading impact can be positive or negative, depending on whether intervention enhances the precision of the institution's information relative to that of uninformed traders. Thus, the ability to speculate can increase or reduce institutional intervention. Key factors that affect intervention include the investors' cost of gathering speculative information, the effectiveness of intervention, and the market's beliefs about the firm's future performance. The paper also discusses the usefulness of "short-swing" provisions and restricted shares in aligning the institution's incentives with shareholder value, and implications for ownership structure across different firms.
JEL Classification: G32, G20
Suggested Citation: Suggested Citation