Shareholder Heterogeneity: Evidence and Implications

Abstract

The perfect market paradigm provides a powerful foundation for financial theory. In perfect capital markets, there are no transaction costs, all traders have equal and costless access to information, and traders act as price takers. If existing claims span the state space, excess supply curves are perfectly elastic. Moreover, differences in preferences or beliefs do not result in disagreement among shareholders about firm policies. Underlying this unanimity is the shared valuation of the stock, which translates into agreement about firm strategies. The ability to transact without affecting the market price is central to many important propositions, including the ModiglianiMiller irrelevance theorems. This paper examines the nature of supply curves for corporate equity. Until recently there has been little direct empirical assessment of their elasticity. At issue is whether or not the supposition of shareholder homogeneity of valuations (and its implications) represents a good approximation to actual markets. This paper's call for further empirical evaluation of shareholder valuations echoes the perspective offered by Eugene Fama and Merton Miller, who in discussing perfect markets observed that

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