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The Wall Street stampede: Exit as governance with interacting blockholders

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  • Cvijanović, Dragana
  • Dasgupta, Amil
  • Zachariadis, Konstantinos E.

Abstract

The growth of the asset management industry has made it commonplace for firms to have multiple institutional blockholders. In such firms, the strength of governance via exit depends on how blockholders react to each other’s exit. We present a model to show that open-ended institutional investors such as mutual funds react strongly to an informed blockholder’s exit, leading to correlated exits that enhance corporate governance. Our analysis points to a new role for mutual funds in corporate governance. We examine the trades of mutual funds around exits by activist hedge funds to present empirical evidence consistent with our model.

Suggested Citation

  • Cvijanović, Dragana & Dasgupta, Amil & Zachariadis, Konstantinos E., 2022. "The Wall Street stampede: Exit as governance with interacting blockholders," Journal of Financial Economics, Elsevier, vol. 144(2), pages 433-455.
    • Handle: RePEc:eee:jfinec:v:144:y:2022:i:2:p:433-455
    DOI: 10.1016/j.jfineco.2022.02.005
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    1. Wang, Liang, 2023. "Mitigating firm-level political risk in China: The role of multiple large shareholders," Economics Letters, Elsevier, vol. 222(C).

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    More about this item

    Keywords

    Institutional investors; Competition for flow; Governance via exit; Correlated trading;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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