Public trading and private incentives

Gromb, D and Faure-Grimaud, A (2001) Public trading and private incentives. Working Paper. London Business School IFA Working Paper.

Abstract

This paper studies the link between public trading and the activity of a firm's large shareholder who can affect firm value. Public trading results in the formation of a stock price that is informative about the large shareholder's activity. This increases the latter's incentive to engage in valueincreasing activities. Indeed, if he has to liquidate part of his stake before the effect of his activity is publicly observed, a more informative price rewards him for his activity. Implications are derived for the decision to go public, capital structure, and security design.