Asset Float and Speculative Bubbles
NBER Working Paper No. 11367
We model the relationship between asset float (tradeable shares) and speculative bubbles. Investors trade a stock with limited float because of insider lock-ups. They have heterogeneous beliefs due to overconfidence and face short-sales constraints. A bubble arises as price overweighs optimists' beliefs and investors anticipate the option to resell to those with even higher valuations. The bubble's size depends on float as investors anticipate an increase in float with lock-up expirations and speculate over the degree of insider selling. Consistent with the internet experience, the bubble, turnover and volatility decrease with float and prices drop on the lock-up expiration date.
Published: Hong, Harrison, Jos Scheinkman and Wei Xiong. "Asset Float And Speculative Bubbles," Journal of Finance, 2006, v61(3,Jun), 1073-1117.
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