Ownership Structure, Speculation, and Shareholder Intervention

Authors

  • Charles Kahn,

    1. College of Commerce and Business Administration, University of Illinois at Urbana–Champaign
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  • Andrew Winton

    1. J.L. Kellogg Graduate School of Management, Northwestern University
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    • Kahn is at the College of Commerce and Business Administration, University of Illinois at Urbana-Champaign, and Winton is at the J.L. Kellogg Graduate School of Management, Northwestern University. This paper is a substantial revision of our earlier paper entitled “Ownership Structure, Liquidity Demand, and Shareholder Monitoring.” In revising this version, we are grateful to Mike Fishman, Kathleen Hagerty, Debbie Lucas, Raghu Rajan, René Stulz (the editor), and an anonymous referee for comments and suggestions. Winton thanks the Banking Research Center at Northwestern University and the University of Rome “Tor Vergata” Financial Conference for research support. All mistakes remain our own responsibility.

Abstract

An institution holding shares in a firm can use information about the firm both for trading (“speculation”) and for deciding whether to intervene to improve firm performance. Intervention increases the value of the institution's existing shareholdings, but intervention only increases the institution's trading profits if it enhances the precision of the institution's information relative to that of uninformed traders. Thus, the ability to speculate can increase or decrease institutional intervention. We examine key factors that affect the intervention decision, the usefulness of “short-swing” provisions and restricted shares in encouraging institutional intervention, and implications for ownership structure across different firms.

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