Local ownership as private information: Evidence on the monitoring-liquidity trade-off |
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Authors: | Jose-Miguel Gaspar Massimo Massa |
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Institution: | 1. Finance Department, ESSEC Business School, Avenue Bernard Hirsch, Cergy Pontoise, 95021, France;2. Finance Department, INSEAD, Boulevard de Constance, 77300 Fontainebleau, France |
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Abstract: | We investigate how ownership patterns affect the way the firm is monitored, the liquidity of its shares, and its stock price. We show that informed ownership improves governance and induces value-enhancing decisions (less over-investment and fewer but better acquisitions). At the same time, it increases the adverse selection discount required by less informed investors to trade, reducing the firm's liquidity. Both effects are impounded in the stock price. This explains why ownership seems to be unrelated to performance. Informed investors affect prices in opposite directions: monitoring would raise prices, but the lower liquidity induced by their presence would reduce them. |
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Keywords: | G30 G23 G32 |
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