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Solution Library
Stock Diversification Effect On Share Price
Question
GeKay stock is worth $100, or $80, or $60. Investors believe that each case is equally likely so that the current share price is the average, namely $80.
Suppose Mr. Satanak, the company CEO, announces that he will sell most of his holdings of the stock to diversify (and investors believe his motivation). Diversifying is known to be worth 10% of the share price – that is, the CEO would be willing to receive up to 10% less than the shares are worth to achieve the benefits of diversification.
If investors believe that Mr. Satanak knows the true value of the stock, how will the share price change (be precise here) if he tries to sell? (Assume that any attempt to sell is immediately observable by investors).
Summary
The question belongs to Finance and it discusses about a CEO who announces that he will sell most of his holdings of the company to diversify the stock. The effect of share price with such a decision has been discussed in the solution.
Total Word Count 38
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