John Gathergood, David Hirshleifer, David Leake, Hiroaki Sakaguchi, Neil Stewart, 22 June 2019

Investors who choose to build their own portfolios by stock-picking face the choice of how to diversify among stocks. The 1/N heuristic, equalising portfolio shares across stocks held, works well in practice. This column shows that investors who buy stocks often employ a different form of 1/N, dividing purchase value equally rather than maintaining a 1/N allocation. By narrowly framing their buy-day decision, these investors move their portfolios farther away from balance.

Alex Edmans, Vivian Fang, Emanuel Zur, 16 February 2013

The stock market is a powerful tool for controlling corporations’ behaviour. But which is better, a highly liquid market or a number of large blockholders? This column argues in favour of liquidity. Evidence suggests that policymakers should not reduce stock liquidity through greater regulation. While the idea that liquidity encourages short-term trading – rather than long-term governance – sounds intuitive, deeper analysis shows that liquidity is beneficial because it encourages large shareholders to form in the first place, and allows shareholders to punish underperforming firms through selling their stake.

CEPR Policy Research