Weak Governance by Informed Active Shareholders

The “Wall Street walk” and shareholder activism: Exit as a form of voice

Eitan Goldman and Wenyu Wang

The Review of Financial Studies, 2021, vol. 34, issue 2, 661-699

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.

JEL-codes: G14 G23 G34 (search for similar items in EconPapers)
Date: 2021
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