Blockholder Trading, Market Efficiency, and Managerial Myopia

Abstract

This paper analyzes how blockholders can exert governance even if they cannot intervene in a firm's operations. Blockholders have strong incentives to monitor the firm's fundamental value, since they can sell their stakes upon negative information. By trading on private information (following the "Wall Street Rule"), they cause prices to reflect fundamental value rather than current earnings. This in turn encourages managers to invest for long-run growth rather than short-term profits. Contrary to the view that the U.S.'s liquid markets and transient shareholders exacerbate myopia, I show that they can encourage investment by impounding its effects into prices.

Keywords: Blockholders, market efficiency, myopia, short-termism, intangible investment, Wall Street Rule, voting with your feet

JEL Classification: D82, G14, G32