Empty Voting and the Efficiency of Corporate Governance

52 Pages Posted: 25 Mar 2008 Last revised: 27 Mar 2010

Alon Brav

Duke University - Fuqua School of Business

Richmond D. Mathews

University of Maryland - Department of Finance

Date Written: February 3, 2010

Abstract

We model corporate voting outcomes when an informed trader, such as a hedge fund, can establish separate positions in a firm’s shares and votes (“empty voting”). The positions are separated by borrowing shares on the record date, hedging economic exposure, or trading between record and voting dates. We find that the trader’s presence can improve efficiency overall despite the fact that it sometimes ends up selling to a net short position and then voting to decrease firm value. An efficiency improvement is likely if other shareholders’ votes are not highly correlated with the correct decision or if it is relatively expensive to separate votes from shares on the record date. On the other hand, empty voting will tend to decrease efficiency if it is relatively inexpensive to separate votes from shares and other shareholders are likely to vote the right way.

Keywords: voting, trading, hedge funds, corporate governance

JEL Classification: G34

Suggested Citation

Brav, Alon and Mathews, Richmond D., Empty Voting and the Efficiency of Corporate Governance (February 3, 2010). AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1108632 or http://dx.doi.org/10.2139/ssrn.1108632

Alon Brav

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-2908 (Phone)
919-684-2818 (Fax)

Richmond D. Mathews (Contact Author)

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

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