When stakeholder protection is left to the voluntary initiative of managers, relations with social activists may become an effective entrenchment strategy for inefficient CEOs. We thus argue that managerial turnover and firm value are increased when explicit stakeholder protection is introduced so as to deprive incumbent CEOs of activists' support. This finding provides a rationale for the emergence of specialized institutions (social auditors and ethic indexes) that help firms commit to stakeholder protection even in the case of managerial replacement. Our theory also explains a recent trend whereby social activist organizations and institutional shareholders are showing a growing support for each other's agenda.
When stakeholder protection is left to the voluntary initiative of managers, relations with social activists may become an effective entrenchment strategy for inefficient CEOs. We thus argue that managerial turnover and firm value are increased by the institutionalization of stakeholder protection depriving incumbent CEOs of activists' support. This finding provides a rationale for the emergence of specialized institutions (social auditors and ethic indexes) that help firms commit to stakeholder protection even in case of managerial replacement. Our theory also explains a recent trend whereby social activist organizations and institutional shareholders are showing a growing support for each others' agenda.
This is the accepted version of the paper.This version of the publication may differ from the final published version. We investigate the dynamics of prices, information and expectations in a competitive, noisy, dynamic asset pricing equilibrium model with long-term investors. We argue that the fact that prices can score worse or better than consensus opinion in predicting the fundamentals is a product of endogenous short-term speculation. For a given, positive level of residual payoff uncertainty, if liquidity trades display low persistence rational investors act like market makers, accommodate the order flow, and prices are farther away from fundamentals compared to consensus. This defines a "Keynesian" region; the complementary region is "Hayekian" in that rational investors chase the trend and prices are systematically closer to fundamentals than average expectations. The standard case of no residual uncertainty and liquidity trading following a random walk is on the frontier of the two regions and identifies the set of deep parameters for which rational investors abide by Keynes' dictum of concentrating on an asset "long term prospects and those only." The analysis also explains momentum and reversal in stock returns and how accommodation and trend chasing strategies differ from these phenomena.
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Liquidity providers in a security often use prices of other securities as a source of information to set their quotes. As a result, liquidity is higher when prices are more informative. In turn, prices are more informative when liquidity is higher. We show that this self-reinforcing relationship between price informativeness and liquidity is a source of contagion and fragility: a small drop in the liquidity of one security propagates to other securities and can, through a feedback loop, result in a large drop in market liquidity. Furthermore, this relationship also generates multiple equilibria characterized either by high illiquidity and low price informativess or low illiquidity and high price informativeness. A switch from the latter to the former type of equilibrium generates a liquidity crash. We use the model to interpret the Flash Crash of May 6, 2010.
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