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RFS Advance Access originally published online on April 2, 2004
Review of Financial Studies 2004 17(4):985-1014; doi:10.1093/rfs/hhh002
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The Review of Financial Studies Vol. 17, No. 4 © 2004 The Society for Financial Studies; all rights reserved.

Public Trading and Private Incentives

Antoine Faure-Grimaud
London School of Economics, FMG, and CEPR London

Denis Gromb
London Business School, and CEPR London

Address correspondence to Antoine Faure-Grimaud, Department of Accounting and Finance and FMG, London School of Economics and CEPR, Houghton Street, London WC2A 2AE, UK. E-mail: A.Faure-Grimaud{at}lse.ac.uk.

This article 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 incentives to engage in value-increasing 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.


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