Ownership Dynamics and Asset Pricing with a Large Shareholder

Posted: 1 Nov 2006

See all articles by Peter M. DeMarzo

Peter M. DeMarzo

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Branko Urosevic

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Abstract

We analyze the optimal trading and ownership policy of a large shareholder who must trade off diversification and monitoring incentives. Without commitment, the problem is similar to durable goods monopoly: the share price today depends on expected future trades. We show that the large shareholder ultimately trades to the competitive price-taking allocation, even though it entails inefficient monitoring. With continuous trading, the large shareholder trades immediately to this allocation if moral hazard is weak enough that her private valuation of a share is decreasing in her stake. Otherwise, the large shareholder adjusts her stake gradually. We consider implications for asset pricing, IPO underpricing, and lockup provisions.

Suggested Citation

DeMarzo, Peter M. and Urosevic, Branko, Ownership Dynamics and Asset Pricing with a Large Shareholder. Journal of Political Economy, Vol. 114, pp. 774-815, August 2006, Available at SSRN: https://ssrn.com/abstract=941148

Peter M. DeMarzo (Contact Author)

Stanford Graduate School of Business ( email )

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HOME PAGE: http://www.stanford.edu/people/pdemarzo

National Bureau of Economic Research (NBER)

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Branko Urosevic

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
34-93-542-2590 (Phone)

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