Communication among Shareholders
Nemanja Antic (Kellogg School, Northwestern U)
This paper provides a model of information transmission among shareholders in an investment venture. An expert shareholder chooses how much information to communicate about the return on investment to a controlling shareholder who controls the investment strategy. Relative to the cheap-talk literature there are two key innovations in our model: fi?rst, that the shareholdings drive the incentive to communicate; second, that these shareholdings are determined endogenously. We embed this new model into two settings. In the fi?rst setting, equity ownership is determined by investors buying shares on a competitive equity market. We provide conditions under which share-trading delivers perfect communication and full risk-sharing. The second setting is a principal-agent relationship where the equity is granted as compensation by a principal (board) to an agent (CEO). Within this setting, the model highlights a novel trade-off between incentivizing export provision and promoting information transmission. Furthermore, the principal-agent setting delivers insights into the effects of prudential regulation.
Paper (pdf) jointly with Nicola Persico