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Voice versus Exit: The Causes and Consequence of Increasing Shareholder Concentration

25 Pages Posted: 29 Aug 2017 Last revised: 18 Sep 2017

Patrick Jahnke

University of Edinburgh - School of Social and Political Science; Deka Investment GmbH

Date Written: September 18, 2017

Abstract

This conceptual paper explains the reasons behind the increase in corporate engagement by institutional shareholders in recent years. While institutional ownership has been high since the turn of the century, what has changed over the past years is that large economies of scale in the fund management industry have resulted in ownership concentration amongst a relatively small number of institutions. This has brought down the cost of engagement at the same time as the ability to exit has decreased as a result of a shift from active to passive funds and as a result of increasing transaction costs for the largest funds. Accompanying these institutional trends has been an evolution in the understanding of fiduciary duty towards one that puts greater weight on the inclusion of environmental, social and governance factors. Applying Hirschman’s concepts of Exit and Loyalty to the investment management industry this paper shows that a rising ownership concentration and the growth in passive assets means that for the majority of institutional shareholders, voice is today more practicable than exit. The inability to exit has resulted in an institutional investor community that is both more powerful and compelled to be more involved in corporate affairs.

Keywords: Ownership, Governance, Engagement, Fiduciary Capitalism, Passive Investment

JEL Classification: G23, G32, G34, L22, P16

Suggested Citation

Jahnke, Patrick, Voice versus Exit: The Causes and Consequence of Increasing Shareholder Concentration (September 18, 2017). Available at SSRN: https://ssrn.com/abstract=3027058

Patrick Jahnke (Contact Author)

University of Edinburgh - School of Social and Political Science ( email )

Edinburgh
United Kingdom

HOME PAGE: http://www.sps.ed.ac.uk/gradschool/our_students/research_student_profiles/politics_and_ir/patrick_ja

Deka Investment GmbH ( email )

Mainzer Landstrasse 16
Frankfurt am Main, 60325
Germany

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