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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
    DOI: 10.1086/506334
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    References listed on IDEAS

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