DP14039 Trading and shareholder voting

Author(s): Doron Levit, Nadya Malenko, Ernst Maug
Publication Date: October 2019
Keyword(s): corporate governance, Shareholder rights, Trading, voting
JEL(s): D74, D82, 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. 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.