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Discussion Paper Details

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Title: The Wall Street Stampede: Exit as Governance with Interacting Blockholders

Author(s): Dragana Cvijanovic, Amil Dasgupta and Konstantinos Zachariadis

Publication Date: July 2019

Keyword(s): corporate governance, exit, Herding and institutional investors

Programme Area(s): Financial Economics

Abstract: In firms with multiple blockholders governance via exit is affected by how blockholders react to each others' exit. Institutional investors, who hold the majority of equity blocks, are heterogeneous in their incentives. How do these incentives affect the manner in which institutional blockholders respond to each others' exit? We present a model that shows that open-ended institutional investors, who are subject to investor redemption risk, will be sensitive to an informed blockholder's exit, giving rise to correlated exits and strengthening governance. Thus, exposure to redemption risk, universally a negative force in asset pricing, plays a positive role in corporate governance. Using data on engagement campaigns by activist hedge funds we present large-sample evidence consistent with our theoretical mechanism.

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Bibliographic Reference

Cvijanovic, D, Dasgupta, A and Zachariadis, K. 2019. 'The Wall Street Stampede: Exit as Governance with Interacting Blockholders'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13870