Time: 1.00 - 2.00pm Venue: Room 3.21 Old Building
Speaker: Bart Taub (Adam Smith Business School, University of Glasgow)
Seminar Title: Inconspicuousness and obfuscation: How large shareholders dynamically manipulate output and information for trading purposes
Paper
Abstract:
The large shareholder literature examines how a large shareholder trades off the advantage of being able to influence the boardroom decisions of the firm, while small shareholders free ride on the outcomes, against the extra risk entailed in large shareholdings. A large shareholder can also profit because his ability to affect fundamentals improves his ability to hide his private information from other informed traders and from market makers in his stock market dealings. In a static version of the model, the large shareholder increases the volatility of firm fundamentals, but by adjusting his trading strategy this increase is of the component of his private information that is unforecastable by the market maker: he obfuscates. As a result, market liquidity falls.
I then use Fourier transform methods, including a new spectral factorisation algorithm, to construct a continuous time dynamic version of the large shareholder model. In the dynamic model, the large shareholder does not just simply amplify the fundamental value of the firm as in the static model: he also alters the fundamental autoregressive structure of the fundamental value process because this improves his ability to hide his private information from other informed traders and from market makers, that is, to obfuscate. As a consequence, the real fundamental processes of the firm are induced to resemble noise trade structurally. The model thus marries market microstructure outcomes with real resource allocation.
