Abstract
AbstractWe consider a public firm characterized by a moral hazard problem. A distinguished player is a CEO or activist shareholder who (i) is unrestricted to trade shares and (ii) has discretion to increase the value of this firm by exerting costly effort. von Lilienfeld-Toal and Rünzi (J Finance 69(3):1013–1050, 2014) investigate and confirm the empirical relevance of both these properties. This article shows that a distinguished player cannot be “priced in” correctly. In particular, such a firm is traded at a discount below its equilibrium value in a market equilibrium. Buyers can systematically earn excess returns on their investment. This prediction is indeed consistent with substantial positive abnormal returns for distinguished player firms within the S &P500 and S &P1500 sample reported in von Lilienfeld-Toal and Rünzi (J Finance 69(3):1013–1050, 2014).
Funder
Johann Wolfgang Goethe-Universität, Frankfurt am Main
Publisher
Springer Science and Business Media LLC
Subject
Statistics, Probability and Uncertainty,Finance,Statistics and Probability
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