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How and Why do Investors Trade Votes, and What Does it Mean?

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  • Susan E. K. Christoffersen

    ()

  • Christopher C. Geczy
  • David K. Musto
  • Adam V. Reed

Abstract

The standard analysis of corporate governance is that shareholders vote in the ratios that firms choose, such as one-share-one-vote. But if the cost of unbundling and trading votes is sufficiently low, then shareholders vote in the ratios that they themselves choose. We document an active market for votes within the equity-loan market, where we find that the average vote sells for zero. We hypothesize that asymmetric information motivates these vote reallocations, and we find support for this view in the cross section of votes: there is more trade for higher-spread firms and more for poor performers, especially when the vote is close. We also find that the vote reallocations correspond to support for shareholder proposals and opposition to management proposals. L'analyse classique de la gouvernance d'entreprise suppose que les actionnaires votent selon les modalités choisies par la firme, par exemple un vote par action. Mais si les coûts associés à la séparation et à l'échange des votes sont suffisamment faibles, alors les actionnaires votent selon les modalités qu'ils ont eux-mêmes choisies. Nous présentons le cas d'un marché actif de votes au sein du marché des mises de fonds sous forme d'emprunts (equity loans), où nous constatons qu'en moyenne les votes se vendent pour rien. Nous supposons que l'asymétrie d'information provoque cette réallocation des votes, et nous étayons cette hypothèse à travers l'étude transversale des votes : le nombre d'opérations est plus important pour les compagnies dont l'écart acheteur-vendeur est plus élevé ainsi que pour celles dont les résultats sont plus faibles, particulièrement lorsque le vote est clos. Cette étude montre aussi que la réallocation des votes permet de soutenir les propositions des actionnaires et de s'opposer à celles des gestionnaires.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2004s-23.

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Date of creation: 01 May 2004
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Handle: RePEc:cir:cirwor:2004s-23

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Keywords: vote trading; corporate governance; equity lending; information asymmetry; transaction de votes; gouvernance d'entreprise; prêt d'actions; asymétrie d'information;

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References

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  1. Timothy J. Feddersen & Wolfgang Pesendorfer, 1995. "The Swing Voter's Curse," Discussion Papers 1064, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Gillan, Stuart L. & Starks, Laura T., 2000. "Corporate governance proposals and shareholder activism: the role of institutional investors," Journal of Financial Economics, Elsevier, vol. 57(2), pages 275-305, August.
  3. Zvika NEEMAN & Gerhard O. OROSEL, 1999. "Corporate Vote-Trading as an Instrument of Corporate Governance," Vienna Economics Papers vie9904, University of Vienna, Department of Economics.
  4. Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2001. "Corporate Governance and Equity Prices," NBER Working Papers 8449, National Bureau of Economic Research, Inc.
  5. Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2002. "Stocks are special too: an analysis of the equity lending market," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 241-269.
  6. Jennifer E. Bethel & Stuart L. Gillan, 2002. "The Impact of the Institutional and Regulatory Environment on Shareholder Voting," Financial Management, Financial Management Association, vol. 31(4), Winter.
  7. Blair, Douglas H & Golbe, Devra L & Gerard, James M, 1989. "Unbundling the Voting Rights and Profit Claims of Common Shares," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 420-43, April.
  8. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-88, June.
  9. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
  10. Christoffersen, Susan E. K. & Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2003. "The Limits to Dividend Arbitrage: Implications for Cross-Border Investment," Working Papers 03-2, University of Pennsylvania, Wharton School, Weiss Center.
  11. Ernst Maug, 1998. "Large Shareholders as Monitors: Is There a Trade-Off between Liquidity and Control?," Journal of Finance, American Finance Association, vol. 53(1), pages 65-98, 02.
  12. Zingales, Luigi, 1995. "What Determines the Value of Corporate Votes?," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1047-73, November.
  13. Karpoff, Jonathan M. & Malatesta, Paul H. & Walkling, Ralph A., 1996. "Corporate governance and shareholder initiatives: Empirical evidence," Journal of Financial Economics, Elsevier, vol. 42(3), pages 365-395, November.
  14. Harris, Milton & Raviv, Artur, 1988. "Corporate governance : Voting rights and majority rules," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 203-235, January.
  15. D'Avolio, Gene, 2002. "The market for borrowing stock," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 271-306.
  16. Wahal, Sunil, 1996. "Pension Fund Activism and Firm Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 1-23, March.
  17. Easterbrook, Frank H & Fischel, Daniel R, 1983. "Voting in Corporate Law," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 395-427, June.
  18. Robert C. Apfel & John E. Parsons & G. William Schwert & Geoffrey S. Stewart, 2001. "Short Sales, Damages and Class Certification in 10b-5 Actions," NBER Working Papers 8618, National Bureau of Economic Research, Inc.
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Cited by:
  1. Boni, Leslie, 2006. "Strategic delivery failures in U.S. equity markets," Journal of Financial Markets, Elsevier, vol. 9(1), pages 1-26, February.

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