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The "Wall Street Walk" and Shareholder Activism: Exit as a Form of Voice

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Author Info

  • Anat R. Admati
  • Paul Pfleiderer

Abstract

We examine whether a large shareholder can alleviate conflicts of interest between managers and shareholders through the credible threat of exit on the basis of private information. In our model, the threat of exit often reduces agency costs, but additional private information need not enhance the effectiveness of the mechanism. Moreover, the threat of exit can produce quite different effects depending on whether the agency problem involves desirable or undesirable actions from shareholders' perspective. Our results are consistent with empirical findings on the interaction between managers and minority large shareholders and have further empirical implications. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 22 (2009)
Issue (Month): 7 (July)
Pages: 2445-2485

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Handle: RePEc:oup:rfinst:v:22:y:2009:i:7:p:2445-2485

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References

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  1. Jay C. Hartzell & Laura T. Starks, 2003. "Institutional Investors and Executive Compensation," Journal of Finance, American Finance Association, vol. 58(6), pages 2351-2374, December.
  2. Thomas H. Noe, 2002. "Investor Activism and Financial Market Structure," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 289-318, March.
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  4. Burkart, Mike & Gromb, Denis & Panunzi, Fausto, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 693-728, August.
  5. Tiroley, Jean, 2000. "Corporate Governance," CEI Working Paper Series 2000-1, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
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  7. Admati, Anat R & Pfleiderer, Paul & Zechner, Josef, 1994. "Large Shareholder Activism, Risk Sharing, and Financial Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1097-1130, December.
  8. Parrino, Robert & Sias, Richard W. & Starks, Laura T., 2003. "Voting with their feet: institutional ownership changes around forced CEO turnover," Journal of Financial Economics, Elsevier, vol. 68(1), pages 3-46, April.
  9. Mello, Antonio S. & Repullo, Rafael, 2004. "Shareholder activism is non-monotonic in market liquidity," Finance Research Letters, Elsevier, vol. 1(1), pages 2-10, March.
  10. Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 678-709, August.
  11. Willard T. Carleton & James M. Nelson & Michael S. Weisbach, 1998. "The Influence of Institutions on Corporate Governance through Private Negotiations: Evidence from TIAA-CREF," Journal of Finance, American Finance Association, vol. 53(4), pages 1335-1362, 08.
  12. Attari, Mukarram & Banerjee, Suman & Noe, Thomas H., 2006. "Crushed by a rational stampede: Strategic share dumping and shareholder insurrections," Journal of Financial Economics, Elsevier, vol. 79(1), pages 181-222, January.
  13. Patrick BOLTON & Ernst-Ludwig VON THADDEN, 1996. "Blocks, Liquidity, and Corporate Control," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9619, Université de Lausanne, Faculté des HEC, DEEP.
  14. Alon Brav & Wei Jiang & Frank Partnoy & Randall Thomas, 2008. "Hedge Fund Activism, Corporate Governance, and Firm Performance," Journal of Finance, American Finance Association, vol. 63(4), pages 1729-1775, 08.
  15. Stuart L. Gillan & Laura T. Starks, 2007. "The Evolution of Shareholder Activism in the United States," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(1), pages 55-73.
  16. Steven Huddart, 1993. "The Effect of a Large Shareholder on Corporate Value," Management Science, INFORMS, vol. 39(11), pages 1407-1421, November.
  17. Charles Kahn & Andrew Winton, 1998. "Ownership Structure, Speculation, and Shareholder Intervention," Journal of Finance, American Finance Association, vol. 53(1), pages 99-129, 02.
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Citations

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Cited by:
  1. Audretsch, David B. & Hülsbeck, Marcel & Lehmann, Erik E., 2013. "Families as active monitors of firm performance," Journal of Family Business Strategy, Elsevier, vol. 4(2), pages 118-130.
  2. Attig, Najah & Cleary, Sean & El Ghoul, Sadok & Guedhami, Omrane, 2012. "Institutional investment horizon and investment–cash flow sensitivity," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1164-1180.
  3. He, Wen & Li, Donghui & Shen, Jianfeng & Zhang, Bohui, 2013. "Large foreign ownership and stock price informativeness around the world," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 211-230.
  4. Brav, Alon & Mathews, Richmond D., 2011. "Empty voting and the efficiency of corporate governance," Journal of Financial Economics, Elsevier, vol. 99(2), pages 289-307, February.
  5. Alex Edmans & Vivian W. Fang & Emanuel Zur, 2011. "The Effect of Liquidity on Governance," NBER Working Papers 17567, National Bureau of Economic Research, Inc.
  6. Khanna, Naveen & Mathews, Richmond D., 2012. "Doing battle with short sellers: The conflicted role of blockholders in bear raids," Journal of Financial Economics, Elsevier, vol. 106(2), pages 229-246.
  7. Parlour, Christine A. & Winton, Andrew, 2013. "Laying off credit risk: Loan sales versus credit default swaps," Journal of Financial Economics, Elsevier, vol. 107(1), pages 25-45.
  8. Goldman, Eitan & Strobl, Günter, 2013. "Large shareholder trading and the complexity of corporate investments," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 106-122.
  9. Helwege, Jean & Intintoli, Vincent J. & Zhang, Andrew, 2012. "Voting with their feet or activism? Institutional investors’ impact on CEO turnover," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 22-37.

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