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RFS Advance Access published online on April 2, 2004
Review of Financial Studies, doi:10.1093/rfs/hhh002
Review of Financial Studies © The Society for Financial Studies 2004; all rights reserved
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The Review of Financial Studies © The Society for Financial Studies 2004; all rights reserved.

Original Articles

Public Trading and Private Incentives

Antoine Faure-Grimaud 1* and Denis Gromb 2
1 London School of Economics, FMG and CEPR London, United Kingdom
2 London Business School, and CEPR London, United Kingdom

* To whom correspondence should be addressed. E-mail: A.Faure-Grimaud{at}lse.ac.uk.


  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 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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