“The Effect of Diversification on Price Informativeness and Asset Values” by Alex Edmans
LBS, CEPR, and ECGI
We study how an asset's price informativeness and fundamental value depends on an informed investor's holdings of other, potentially unrelated, assets. If an asset is sold by a concentrated owner without other holdings, the price decline is low since the sale may be motivated by a liquidity shock. A diversified owner has the choice of which assets to sell upon a shock. Thus, a sale is more revealing of poor asset quality, increasing price informativeness. Even though prices are more revealing, the seller may acquire more information under diversification. When asset values are endogenous, diversification increases incentives to improve value since the asset commands a low price if sold. Keywords: Corporate governance, banks, blockholders, monitoring, intervention, exit, trading, common ownership.