45 Pages Posted: 8 Dec 2011 Last revised: 18 Oct 2014
Date Written: October 17, 2014
This paper studies informal communications and exit as alternative ways through which investors can influence managers when obtaining control is not feasible or too costly. The first result shows that exit relaxes the tension between investors and managers, and thereby enhances the effectiveness of communications as a form of shareholder activism. The second result shows that public communications are more effective than private communications if and only if managers are concerned about the stock price and their decisions are observed by the market. Overall, the analysis relates the effectiveness of communications to market liquidity; entrenchment and compensation structure of managers; and investors' expertise, investment horizon and ownership size.
Keywords: Shareholder Activism, Voice, Exit, Corporate Governance, Communication, Cheap-Talk
JEL Classification: D74, D82, D83, G34
Suggested Citation: Suggested Citation