Weak Governance by Informed Active Shareholders. (4th May 2020)

• Record Type: Journal Article
• Authors: Goldman, Eitan; Wang, Wenyu
• Editors: Cornelli, Francesca
• Is Part Of: Review of financial studies. Volume 34:Number 2(2021)
• Page Start: 661
• Page End: 699
• Publication Date: 2020-05-04
• Subjects: G14 -- G23 -- G34; Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/hhaa052
• Languages: English
• ISSNs: 0893-9454

Abstract

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.