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Blockholder Trading, Market Efficiency, and Managerial Myopia

35 Pages Posted: 22 Nov 2006 Last revised: 7 Dec 2011

Alex Edmans

London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Date Written: August 4, 2011

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.

Keywords: Blockholders, market efficiency, myopia, short-termism, intangible investment, Wall Street Rule, voting with your feet

JEL Classification: D82, G14, G32

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: https://ssrn.com/abstract=946669

Alex Edmans (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

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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