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Blockholders, Market Efficiency, And Managerial Myopia

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Executive Summary

This paper shows how blockholders can add value 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 bad news. By trading on their 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, this paper shows that they can encourage investment by impounding its effects into prices.

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