Working Paper: CEPR ID: DP17363
Authors: Ali Kakhbod; Uliana Loginova; Andrey Malenko; Nadya Malenko
Abstract: We study the effectiveness of shareholder engagement, that is, shareholders communicating their views to management. When shareholders and management have different beliefs, each shareholder engages more effectively when other shareholders engage as well. A limited shareholder base can thus prevent effective engagement. However, a limited shareholder base naturally arises under heterogeneous beliefs because investors who most disagree with management do not become shareholders. Passive funds, which own the firm regardless of their beliefs, can counteract these effects and improve engagement. When shareholders' and management's preferences are strongly misaligned, shareholders' engagement decisions become substitutes and the role of ownership structure declines.
Keywords: shareholder engagement; communication; advice; managerial learning; cheap talk; heterogeneous beliefs; ownership structure; passive funds; advisory voting
JEL Codes: D71; D74; D82; D83; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| effective shareholder engagement (G38) | improved managerial learning (M53) |
| aligned beliefs between shareholders and management (G34) | effective shareholder engagement (G38) |
| heterogeneous beliefs (D80) | limited shareholder base (G34) |
| limited shareholder base (G34) | inhibited effective engagement (O17) |
| passive funds (G23) | enhanced engagement (O36) |
| passive funds (G23) | improved managerial learning (M53) |
| strongly misaligned preferences (D81) | substitutes rather than complements in engagement decisions (D10) |