Articles

Public Trading and Private Incentives

A. FAURE-GRIMAUD, D. GROMB

Review of Financial Studies

4 April 2004, vol. 17, n°4, pp.985-1014

Departments: GREGHEC (CNRS)


This article 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 are derived for the decision to go public, capital structure, and security design.


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