I don’t get the divestment argument, please help me understand why I’m wrong.
Here’s how I understand it:
If Bob offers to pay Alice whatever Evil-Corp™ would have paid in stock dividends in exchange for what Alice would have paid for an Evil-Corp™ stock, Evil-Corp™ has to find another buyer. Since Alice was the buyer willing to pay the most, Evil-Corp™ now loses the difference between what Alice was willing to pay and the next-most willing buyer, Eve, is willing to pay.
Is that understanding correct, or am I missing something crucial?
If my understanding is right, then I don’t understand why divestment works.
Lets assume I know Bob is doing this and I have the same risk-profile as Alice. I know the market price to be distorted, Evil-Corp™ stocks are being sold for less than what they’re worth! After all, Alice deemed the stock to be worth more than what the stock was sold for. If it was not worth the price Alice was willing to pay for it, she wouldn’t have offered to give that price.
Why wouldn’t I just buy the stock from Eve offering to pay the price set by Alice?
So I think the divestment argument that Buck is making is the following:
Assume there are 25 investors, from Alice to Ysabel. Each investor is risk-averse, and so is willing to give up a bit of expected value in exchange for reduced variance, and the more anticorrelated their holdings, the less variance they’ll have. This means Alice is willing to pay more for her first share of EvilCorp stock than she is for her second share, and so on; suppose EvilCorp has 100 shares, and the equilibrium is that each investor has 4 shares.
Suppose now Alice decides that the moral loss of holding EvilCorp stock is larger than the financial gain of having another less-correlated asset, and so offers to sell her EvilCorp shares. The value-to-Alice of those shares before was the 1st share value + 2nd share value + 3rd share value + 4th share value, but the value-to-buyers will be the 5th share value (times 4), which by risk aversion is lower than the 4th share value that it was at before. [This is why you wouldn’t just buy it yourself; you already have 4 shares, and a fifth share is worth less to you than your fourth share.]
As more and more investors divest from EvilCorp, the remaining people willing to invest in EvilCorp find it becoming a larger and larger fraction of their holdings, meaning they pay more in variance, making it less attractive. If there are sufficiently large risk-neutral investors, or sufficiently many small risk-averse investors who don’t own any shares of it yet, divestment barely shifts the value of EvilCorp; if there aren’t, divestment can seriously restrict their access to capital.
I don’t get the divestment argument, please help me understand why I’m wrong.
Here’s how I understand it:
If Bob offers to pay Alice whatever Evil-Corp™ would have paid in stock dividends in exchange for what Alice would have paid for an Evil-Corp™ stock, Evil-Corp™ has to find another buyer. Since Alice was the buyer willing to pay the most, Evil-Corp™ now loses the difference between what Alice was willing to pay and the next-most willing buyer, Eve, is willing to pay.
Is that understanding correct, or am I missing something crucial?
If my understanding is right, then I don’t understand why divestment works.
Lets assume I know Bob is doing this and I have the same risk-profile as Alice. I know the market price to be distorted, Evil-Corp™ stocks are being sold for less than what they’re worth! After all, Alice deemed the stock to be worth more than what the stock was sold for. If it was not worth the price Alice was willing to pay for it, she wouldn’t have offered to give that price.
Why wouldn’t I just buy the stock from Eve offering to pay the price set by Alice?
So I think the divestment argument that Buck is making is the following:
Assume there are 25 investors, from Alice to Ysabel. Each investor is risk-averse, and so is willing to give up a bit of expected value in exchange for reduced variance, and the more anticorrelated their holdings, the less variance they’ll have. This means Alice is willing to pay more for her first share of EvilCorp stock than she is for her second share, and so on; suppose EvilCorp has 100 shares, and the equilibrium is that each investor has 4 shares.
Suppose now Alice decides that the moral loss of holding EvilCorp stock is larger than the financial gain of having another less-correlated asset, and so offers to sell her EvilCorp shares. The value-to-Alice of those shares before was the 1st share value + 2nd share value + 3rd share value + 4th share value, but the value-to-buyers will be the 5th share value (times 4), which by risk aversion is lower than the 4th share value that it was at before. [This is why you wouldn’t just buy it yourself; you already have 4 shares, and a fifth share is worth less to you than your fourth share.]
As more and more investors divest from EvilCorp, the remaining people willing to invest in EvilCorp find it becoming a larger and larger fraction of their holdings, meaning they pay more in variance, making it less attractive. If there are sufficiently large risk-neutral investors, or sufficiently many small risk-averse investors who don’t own any shares of it yet, divestment barely shifts the value of EvilCorp; if there aren’t, divestment can seriously restrict their access to capital.