Free-Riders and Underdogs: Participation in Corporate Voting
56 Pages Posted: 24 Mar 2017 Last revised: 19 Nov 2017
Date Written: September 29, 2017
How do shareholders decide whether to vote? We propose a rational choice model where the participation decision depends on the probability of being pivotal and the costs and benefits of voting. We show that more homogeneity in ex-ante preferences among shareholders yields lower participation rates (free-rider effect), while higher disagreement yields higher participation rates (underdog effect). The model admits a closed-form solution for the equilibrium participation rates. This allows us to calculate hitherto unobserved statistics on the turnout by supporters of either side as well as the perceived importance of proposals, isolated from other variables that affect the probability of being pivotal such as the ownership structure. We document a number of novel stylized facts: shareholder proposals are perceived as more important than management proposals and the most important shareholder proposals are about restructuring.
Keywords: voting participation; corporate governance, shareholder proposals, shareholder preferences, heterogeneity of ownership, institutional ownership
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