DP2505 Public Trading and Private Incentives

Author(s): Antoine Faure-Grimaud, Denis Gromb
Publication Date: July 2000
Keyword(s): Blockholder Incentives, Public Trading, Stock Price Information
JEL(s): G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2505

This paper studies the link between public trading and the activity of a firm's large shareholder who can affect firm value. Public trading results in the formation of a stock price that is informative about the large shareholder's activity. This increases the latter's incentives to engage in value increasing activities. Indeed, if he has to liquidate part of his stake before the effect of his activity is publicly observed, a more informative price rewards him for his activity. Implications of this perspective are derived for the decision to go public and security design.