Moral Hazard, Informed Trading, and Stock Prices

OMI Seminar Series

We analyze a dynamic model of informed trading where a shareholder accumulates sharesin an anonymous market and then expends costly eort to change the rm value. Wend that equilibrium prices are aected by the position accumulated by the shareholder,because the level of eort undertaken is increasing in the size of his acquired position. Inequilibrium, price impact has two components: one due to asymmetric information (asin Kyle (1985)) and one due to moral hazard (a new source of adverse selection). Priceimpact is higher when the acivist is more productive and when uncertainty about hisposition is large. When we consider an `activist' shareholder|who accumulates sharesin order to increase rm value|we obtain a trade-o: with more noise trading (less`price eciency') the activist can build up a larger stake, which leads to more eortexpenditure and higher rm value (more `economic eciency'). The model implies thatactivist ownership disclosure tends to improve market liquidity and value creation byactivists and helps dierentiate productive activists from stock pickers. Shortening theperiod during which activists can trade, however, hurts economic eciency.

Tuesday, May 26, 2015 - 12:30
to 13:30