Essays in Applied Microeconomics
Contributors: Shleifer, Andrei; Hart, Oliver; Glaeser, Edward L.
Published: 2012
Language: eng
Description: Chapter 1 develops a model of parallel trading of corporate securities (shares, bonds) and derivatives in which a large trader can sometimes profitably acquire securities and the corporate control rights inherent therein for the sole purpose of reducing the corporation's value and gaining on a net short position in the corporation created through off-setting derivatives. At other times, the large trader profitably takes a net long position in the corporation and exercises its control rights to maximize the corporation's value. This strategy is profitable if and because other market participants cannot observe the large trader's orders and hence cannot predict how the control rights will be exercised. In effect, the large trader is benefitting from trading on private information about payoff uncertainty that the large trader itself creates. This problem is most likely to manifest in transactions that give blocking powers to small minorities, particularly out-of-bankruptcy restructurings and freezeouts, and is bound to become more severe when derivatives trade on an exchange rather than over-the-counter.
Notes: Keywords: credit default swaps, crime and punishment, derivatives, empty voting, Legal origins, trading.

Thesis Ph.D. Harvard University 2012