Hidden Ownership, Monitoring, and the Value of the Firm

This paper analyzes the effect of market transparency on firm value and social surplus. I investigate the incentives of large investors to publicly disclose their economic interests, as well as to monitor management. I find that when markets are sufficiently liquid, large investors will tend to forgo share ownership in favor of "hidden ownership" - alternative forms of economic exposure not subject to disclosure regulations. The resulting uncertainty regarding the extent of investor exposure to firm performance can better align management's incentives with shareholder interests, thereby increasing firm value and social surplus, even when management displays risk neutral preferences. A transparent market may therefore become a liability from both the shareholder and social planner perspectives.