The Shareholder's Dilemma: Voting and Trading
26 Pages Posted: 3 Sep 2019
Date Written: August 29, 2019
We develop a game theoretic model of shareholder voting that captures the fact that shareholders are traders/investors and assumes that they ultimately seek to maximize the return on their investment. By imbedding a model of shareholder voting in a model of market transactions we are able to better understand the nature of voting and its relationship to the market. The presence of liquidity generates a shareholder dilemma: Voting for the choice that a shareholder thinks is optimal for the rm maximizes her return only if she is pivotal; in all other instances it is better to protect her informational advantage over the market and vote against her information-moving the share price and then capitalizing on her informational advantage by buying or selling shares. The shareholders' dilemma requires that the equilibrium informativeness of voting may be quite low. In the limit shareholder votes are uncorrelated with their private information. Moreover, in all equilibria shareholders will have strong incentives to trade after the votes and heterogeneity in which side of the market they are on will depend on their private information.
Keywords: shareholder voting, corporate governance, information aggregation
JEL Classification: D72, G34, D83
Suggested Citation: Suggested Citation