Local Ownership as Private Information: Evidence on the Monitoring-Liquidity Trade-Off

Massimo Massa and Gaspar, José-Miguel

No 4785, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper investigates the impact of ownership patterns on the way the firm is monitored, on the liquidity of its shares, and on its stock price. Building on the literature showing that local mutual funds (funds holding geographically close firms) enjoy superior returns due to private information, we use local ownership as a proxy for the amount of informed investment. Since location is reasonably exogenous, local ownership provides an identifying restriction that is used to address endogeneity concerns that have been raised in the literature (Demsetz and Lehn, 1985). Using data on a broad panel of US firms, we show that informed ownership improves the quality of governance of the firm and induces value-enhancing decisions (less over-investment and fewer but better acquisitions). At the same time, its presence in the firm increases the adverse selection discount required by less informed investors to trade, reducing the firm?s liquidity. Both effects are properly impounded in the firm?s stock price. Our results provide an economic interpretation of why ownership seems to be unrelated to performance. Informed investors affect prices indirectly, and in opposite directions: their monitoring activity tends to raise prices, but the lower liquidity induced by their presence tends to reduce prices.

Keywords: Local ownership; Corporate governance; Liquidity; Monitoring; Mutual funds; Private ownership (search for similar items in EconPapers)
JEL-codes: G23 G30 G32 (search for similar items in EconPapers)
Date: 2004-12
New Economics Papers: this item is included in nep-fin
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP4785 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:4785

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP4785

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().