Trading and Shareholder Democracy
In many advanced economies, regulatory reforms and charter amendments have empowered shareholders of publicly traded firms by enhancing their voting rights. Shareholders not only elect directors, but frequently vote on executive compensation, corporate transactions, changes to the corporate charter, and social and environmental policies. This shift of power from boards to shareholders assumes that shareholder […]
Doron Levit is Marion B. Ingersoll Endowed Professor of Finance and Business Economics at the University of Washington Foster School of Business, Nadya Malenko is Professor of Finance at the Boston College Carroll School of Management, and Ernst Maug is Professor of Corporate Finance at the University of Mannheim Business School. This post is based on their article forthcoming in the Journal of Finance. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power and Letting Shareholders Set the Rules both by Lucian A. Bebchuk.
In many advanced economies, regulatory reforms and charter amendments have empowered shareholders of publicly traded firms by enhancing their voting rights. Shareholders not only elect directors, but frequently vote on executive compensation, corporate transactions, changes to the corporate charter, and social and environmental policies. This shift of power from boards to shareholders assumes that shareholder voting increases shareholder welfare and firm valuations by aligning the preferences of those who make decisions with those for whom decisions are made—a form of “shareholder democracy.”
In our paper, Trading and Shareholder Democracy, published in the Journal of Finance, we question this argument. The corporate setting is very different from the political setting. A key feature of the corporate setting is the existence of a market for shares, which allows investors to choose their ownership stakes based on their preferences and stock prices. Thus, who gets to vote on the firm’s policies is fundamentally linked to voters’ views on how the firm should be run. The goal of our paper is to examine the effectiveness of shareholder voting considering that the shareholder base forms through trading in the stock market.
