Blockholder Trading, Market Efficiency, and Managerial Myopia

TLDR

Blockholders have strong incentives to monitor a firm’s fundamental value because they can sell their stakes upon negative information. This paper analyzes how blockholders can exert governance even if they cannot intervene in a firm’s operations. By trading on private information (following the “Wall Street Rule”), they cause prices to reflect fundamental value rather than current earnings. The study finds that blockholder trading aligns prices with fundamental value, encouraging managers to invest in long‑run growth rather than short‑term profits, and shows that liquid markets and transient shareholders can actually promote investment by incorporating their effects into prices.

Abstract

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 because 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.