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Moral hazard, informed trading, and stock prices

Author: Pierre Collin Dufresne; Vyacheslav Fos; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2013.
Series: Working paper series (National Bureau of Economic Research), no. 19619.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
We analyze a model of informed trading where an activist shareholder accumulates shares in an anonymous market and then expends costly effort to increase the firm value. We find that equilibrium prices are affected by the position accumulated by the activist, because the level of effort undertaken is increasing in the size of his acquired position. In equilibrium, price impact has two components: one due to  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Pierre Collin Dufresne; Vyacheslav Fos; National Bureau of Economic Research.
OCLC Number: 863463030
Notes: Title from http://www.nber.org/papers/19619 viewed November 20, 2013.
"November 2013."
Description: 1 online resource (62 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 19619.
Responsibility: Pierre Collin-Dufresne, Vyacheslav Fos.

Abstract:

We analyze a model of informed trading where an activist shareholder accumulates shares in an anonymous market and then expends costly effort to increase the firm value. We find that equilibrium prices are affected by the position accumulated by the activist, because the level of effort undertaken is increasing in the size of his acquired position. In equilibrium, price impact has two components: one due to asymmetric information (as in the seminal Kyle (1985) model) and one due to moral hazard (a new source of illiquidity). Price impact is higher the more severe the moral hazard problem, which corresponds to a more productive activist. We thus obtain a trade-off: with more noise trading (less "price efficiency") the activist can build up a larger stake, which leads to more effort expenditure and higher firm value (more "economic efficiency").

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