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Weak Governance by Informed Active Shareholders
[The “Wall Street walk” and shareholder activism: Exit as a form of voice]

Author

Listed:
  • Eitan Goldman
  • Wenyu Wang

Abstract

Do informed shareholders who can influence corporate decisions improve governance? We demonstrate this may not be generally true in a model of takeovers. The model suggests that a shareholder’s ability to collect information and trade ex post may cause him, ex ante, to support pursuing value-destroying takeovers or oppose value-enhancing takeovers. Surprisingly, we find conditions under which giving the active shareholder greater influence weakens governance and reduces firm value, even if such influence power can be used to reject bad takeovers ex post. Our model sheds light on the limitations of relying on informed, active shareholders to improve governance.

Suggested Citation

  • Eitan Goldman & Wenyu Wang, 2021. "Weak Governance by Informed Active Shareholders [The “Wall Street walk” and shareholder activism: Exit as a form of voice]," The Review of Financial Studies, Society for Financial Studies, vol. 34(2), pages 661-699.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:2:p:661-699.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa052
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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • 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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