Large Shareholder Premium

Abstract

We develop a theoretical model to study investors' trading behavior in the presence of large shareholders' influence on a firm's equity. We show that, for a good stock, large shareholders may invest a higher proportion of their wealth in the firm than smart small investors, although they predict the same equity return. Insight is also cast into the impacts of board structure on the firm's equity when the firm possesses several large influential shareholders: (i) the large shareholders collude in trading, and each tends to invest more aggressively as other large shareholders do, and (ii) firms with sole ownership can outperform those with dispersed ownership, if the impact coefficient of the former case exceeds or coincides with the aggregated impact coefficients of the latter.