2.2.1 Market Efficiency

Ownership disclosure can improve market efficiency through various mechanisme. At the time of a public offering, disclosure of the identity of large shareholders, and the number of voting rights they hold, enables investors to anticipate agency costs. Consider the presence of a controlling shareholder, for instance the founder. In some cases, such presence may signal an increase in agency costs due to a heightened risk of private benefit extraction. One way to extract private benefits is through tunneling, as illustrated by the case of Italian dairy producer Parmalat.1 In other cases, the presence of a controlling shareholder may signal a decrease in agency costs, because of active monitoring of management. By requiring issuers to disclose their ownership structure in the prospectus, investors are enabled to make an informed estimate of the implications for the value of the share2

Once the shares are floating, disclosure of the entry or exit of large shareholders enables investors to continue to anticipate agency costs. The appearance of an activist hedge fund, for example, may signal an increase in monitoring. By requiring shareholders to disclose major acquisitions, again, investors are enabled to make an informed estimate of the implications for the value of the share — this is one of the objectives of the US disclosure regime.3 Indeed, we often see share prices responding positively to the news that an activist hedge fund has acquired a stake.4

Ownership disclosure can improve market efficiency through several other mechanisms, namely by creating transparency of economie interests of major shareholders, of trading interest and of the size of the free float. We do not discuss these mechanisms here in detail.5 The bottom line is that by promoting share price accuracy, ownership disclosure can contribute to market efficiency, and thus ultimately to an efficient allocation of resources in the economy.6