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Asset Float and Speculative Bubbles

  • Harrison Hong
  • Jose Scheinkman
  • Wei Xiong

We model the relationship between asset float (tradeable shares) and speculative bubbles. Investors trade a stock with limited float because of insider lock-ups. They have heterogeneous beliefs due to overconfidence and face short-sales constraints. A bubble arises as price overweighs optimists' beliefs and investors anticipate the option to resell to those with even higher valuations. The bubble's size depends on float as investors anticipate an increase in float with lock-up expirations and speculate over the degree of insider selling. Consistent with the internet experience, the bubble, turnover and volatility decrease with float and prices drop on the lock-up expiration date.

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File URL: http://www.nber.org/papers/w11367.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11367.

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Date of creation: May 2005
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Publication status: published as Hong, Harrison, Jos Scheinkman and Wei Xiong. "Asset Float And Speculative Bubbles," Journal of Finance, 2006, v61(3,Jun), 1073-1117.
Handle: RePEc:nbr:nberwo:11367
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