IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/14039.html
   My bibliography  Save this paper

Trading and shareholder voting

Author

Listed:
  • Levit, Doron
  • Malenko, Nadya
  • Maug, Ernst

Abstract

We study shareholder voting in a model in which trading affects the composition of the shareholder base. In this model, trading and voting are complementary, which gives rise to self-fulfilling expectations about proposal acceptance. We show three main results. First, increasing liquidity and trading opportunities may reduce prices and welfare, because it allows shareholders with more extreme preferences to accumulate large positions and impose their views on more moderate shareholders through voting. Second, prices and welfare can move in opposite directions, which suggests that the former is an invalid proxy for the latter. Third, delegation of the decision to a board of directors may strictly improve shareholder value. However, the optimal board is generally biased, should not be representative of current shareholders, and may not always garner voting support from the majority of shareholders.

Suggested Citation

  • Levit, Doron & Malenko, Nadya & Maug, Ernst, 2019. "Trading and shareholder voting," CEPR Discussion Papers 14039, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14039
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=14039
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
    2. David K. Musto & Bilge Yilmaz, 2003. "Trading and Voting," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 990-1003, October.
    3. Matvos, Gregor & Ostrovsky, Michael, 2010. "Heterogeneity and peer effects in mutual fund proxy voting," Journal of Financial Economics, Elsevier, vol. 98(1), pages 90-112, October.
    4. Gaspar, Jose-Miguel & Massa, Massimo & Matos, Pedro, 2005. "Shareholder investment horizons and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 76(1), pages 135-165, April.
    5. Philip H. Dybvig & Douglas W. Diamond, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue win, pages 14-23.
    6. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-661, September.
    7. Van Wesep, Edward D., 2014. "The Idealized Electoral College voting mechanism and shareholder power," Journal of Financial Economics, Elsevier, vol. 113(1), pages 90-108.
    8. Marco Becht & Andrea Polo & Stefano Rossi, 2016. "Does Mandatory Shareholder Voting Prevent Bad Acquisitions?," Review of Financial Studies, Society for Financial Studies, vol. 29(11), pages 3035-3067.
    9. Davis, Gerald F. & Kim, E. Han, 2007. "Business ties and proxy voting by mutual funds," Journal of Financial Economics, Elsevier, vol. 85(2), pages 552-570, August.
    10. Sugden, Robert & Zamarron, Ignacio E., 2006. "Finding the key: The riddle of focal points," Journal of Economic Psychology, Elsevier, vol. 27(5), pages 609-621, October.
    11. Ashwini K. Agrawal, 2012. "Corporate Governance Objectives of Labor Union Shareholders: Evidence from Proxy Voting," Review of Financial Studies, Society for Financial Studies, vol. 25(1), pages 187-226.
    12. Doron Levit & Nadya Malenko, 2011. "Nonbinding Voting for Shareholder Proposals," Journal of Finance, American Finance Association, vol. 66(5), pages 1579-1614, October.
    13. GEVERS, Louis, 1974. "Competitive equilibrium of the stock exchange and Pareto efficiency," CORE Discussion Papers RP 198, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    14. Andrey Malenko & Nadya Malenko, 2019. "Proxy Advisory Firms: The Economics of Selling Information to Voters," Journal of Finance, American Finance Association, vol. 74(5), pages 2441-2490, October.
    15. Iván Werning & George-Marios Angeletos, 2006. "Crises and Prices: Information Aggregation, Multiplicity, and Volatility," American Economic Review, American Economic Association, vol. 96(5), pages 1720-1736, December.
    16. Garlappi, Lorenzo & Giammarino, Ron & Lazrak, Ali, 2017. "Ambiguity and the corporation: Group disagreement and underinvestment," Journal of Financial Economics, Elsevier, vol. 125(3), pages 417-433.
    17. Cvijanović, Dragana & Dasgupta, Amil & Zachariadis, Konstantinos, 2016. "Ties that bind: how business connections affect mutual fund activism," LSE Research Online Documents on Economics 65929, London School of Economics and Political Science, LSE Library.
    18. Alex Edmans & Gustavo Manso, 2011. "Governance Through Trading and Intervention: A Theory of Multiple Blockholders," Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2395-2428.
    19. Ernst Maug & Kristian Rydqvist, 2009. "Do Shareholders Vote Strategically? Voting Behavior, Proposal Screening, and Majority Rules," Review of Finance, European Finance Association, vol. 13(1), pages 47-79.
    20. Mullins, William & Schoar, Antoinette, 2016. "How do CEOs see their roles? Management philosophies and styles in family and non-family firms," Journal of Financial Economics, Elsevier, vol. 119(1), pages 24-43.
    21. Dragana Cvijanović & Amil Dasgupta & Konstantinos E. Zachariadis, 2016. "Ties That Bind: How Business Connections Affect Mutual Fund Activism," Journal of Finance, American Finance Association, vol. 71(6), pages 2933-2966, December.
    22. David Yermack, 2010. "Shareholder Voting and Corporate Governance," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 103-125, December.
    23. Kelsey, David & Milne, Frank, 1996. "The existence of equilibrium in incomplete markets and the objective function of the firm," Journal of Mathematical Economics, Elsevier, vol. 25(2), pages 229-245.
    24. Frank Heinemann & Rosemarie Nagel & Peter Ockenfels, 2004. "The Theory of Global Games on Test: Experimental Analysis of Coordination Games with Public and Private Information," Econometrica, Econometric Society, vol. 72(5), pages 1583-1599, September.
    25. Peter M. DeMarzo, 1993. "Majority Voting and Corporate Control: The Rule of the Dominant Shareholder," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 713-734.
    26. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    corporate governance; Shareholder rights; Trading; voting;

    JEL classification:

    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:14039. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.