DP14039 Trading and shareholder democracy

Author(s): Doron Levit, Nadya Malenko, Ernst Maug
Publication Date: October 2019
Date Revised: February 2020
Keyword(s): corporate governance, delegation, Shareholder rights, Trading, voting
JEL(s): D74, D83, G34, K22
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14039

We study shareholder voting in a model in which trading affects the composition of the shareholder base. Trading and voting are complementary, which gives rise to self-fulfilling expectations about proposal acceptance and multiple equilibria. Increasing liquidity may reduce prices and welfare, because it allows extreme shareholders to gain more weight in voting. Prices and welfare can move in opposite directions, so the former are an invalid proxy for the latter. Delegating decision-making to the board can improve shareholder value. However, the optimal board is biased, does not represent current shareholders, and may not garner support from the majority of shareholders.