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Ownership Dynamics and Asset Pricing with a Large Shareholder

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  • Peter M. DeMarzo
  • Branko Uro

Abstract

We analyze the optimal trading and ownership policy of a large shareholder who must trade off diversification and monitoring incentives. Without commitment, the problem is similar to durable goods monopoly: the share price today depends on expected future trades. We show that the large shareholder ultimately trades to the competitive price-taking allocation, even though it entails inefficient monitoring. With continuous trading, the large shareholder trades immediately to this allocation if moral hazard is weak enough that her private valuation of a share is decreasing in her stake. Otherwise, the large shareholder adjusts her stake gradually. We consider implications for asset pricing, IPO underpricing, and lockup provisions.

Suggested Citation

  • Peter M. DeMarzo & Branko Uro, 2006. "Ownership Dynamics and Asset Pricing with a Large Shareholder," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 774-815, August.
  • Handle: RePEc:ucp:jpolec:v:114:y:2006:i:4:p:774-815
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    1. repec:hrv:faseco:30728046 is not listed on IDEAS
    2. Mike Burkart & Denis Gromb & Fausto Panunzi, 1998. "Why Higher Takeover Premia Protect Minority Shareholders," Journal of Political Economy, University of Chicago Press, pages 172-204.
    3. Zvi Griliches, 1996. "The Discovery of the Residual: A Historical Note," Journal of Economic Literature, American Economic Association, pages 1324-1330.
    4. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    5. repec:hrv:faseco:30747162 is not listed on IDEAS
    6. Mike Burkart & Denis Gromb & Fausto Panunzi, 1998. "Why Higher Takeover Premia Protect Minority Shareholders," Journal of Political Economy, University of Chicago Press, pages 172-204.
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