Moral Hazard, Informed Trading, and Stock Prices
AbstractWe 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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Date of creation: Nov 2013
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Find related papers by JEL classification:
- G0 - Financial Economics - - General
- G1 - Financial Economics - - General Financial Markets
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G3 - Financial Economics - - Corporate Finance and Governance
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
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