Working Paper: CEPR ID: DP13870
Authors: Dragana Cvijanovic; Amil Dasgupta; Konstantinos Zachariadis
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.
Keywords: corporate governance; institutional investors; exit; herding
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| informed blockholder's exit (G34) | flow-motivated investors sell shares (G11) |
| informed blockholder's exit (G34) | governance mechanism enhancement (G38) |
| flow-motivated investors sell shares (G11) | price drop (D49) |
| informed blockholder's exit (G34) | governance threat amplification (G38) |