Weak Governance by Informed Active Shareholders

54 Pages Posted: 23 Apr 2016 Last revised: 23 Oct 2020

See all articles by Eitan Goldman

Eitan Goldman

Indiana University - Kelley School of Business - Department of Finance; European Corporate Governance Institute (ECGI)

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance

Date Written: October 1, 2020

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 value-destroying takeovers or oppose value-enhancing takeovers. Surprisingly, we find conditions under which giving the active shareholder greater influence power 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 why relying on informed, active shareholders to improve governance has its limits.

Keywords: informed shareholders, trading, influencing, corporate governance, takeovers

JEL Classification: G14,G23, G34

Suggested Citation

Goldman, Eitan and Wang, Wenyu, Weak Governance by Informed Active Shareholders (October 1, 2020). Review of Financial Studies, forthcoming, European Corporate Governance Institute (ECGI) - Finance Working Paper No. 469/2016, Available at SSRN: https://ssrn.com/abstract=2768328 or http://dx.doi.org/10.2139/ssrn.2768328

Eitan Goldman (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-856-0749 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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