When a Master Dies: Speculation and Asset Float
The death of an artist constitutes a negative supply shock to his future production; in finance terms, this supply shock reduces the artist's float. Intuition may thus suggest that this supply shock reduces the future auction volume of the artist. However, if collectors have fluctuating heterogeneous beliefs, since they cannot sell short, prices overweigh optimists' beliefs and have a speculative component. If collectors have limited capacity to bear risk, an increase in float may decrease subsequent turnover and prices (Hong et al. 2006). Symmetrically, a negative supply shock leads to an augmentation of prices and turnover. We find strong support for this prediction in the data on art auctions that we examine.
We would like to thank Marcelo Fernandes, Ed Glaeser, Florian Heider, Harrison Hong, and seminar participants at Columbia University, at the Arrow Lecture at the Hebrew University of Jerusalem, SBFIN (Brazil), Tokyo University, University of Luxembourg, the European Winter Finance Conference, and the Yale-RFS Real and Private-Value Assets Conference for comments, Jialin Yu for providing the original data of Xiong and Yu (2011), and John Silberman for a insightful conversation on artists’ estates. We also thank Raghav Bansal, Zoey Chopra, Kristine Fu, and Emilio Garcia for excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.