Trading and Shareholder Democracy
60 Pages Posted: 3 Oct 2019 Last revised: 6 Aug 2020
Date Written: July 13, 2020
We study shareholder voting in a model in which trading affects the composition of the shareholder base. Trading and voting are complementary, which gives rise to self-fulfilling expectations about proposal acceptance and multiple equilibria. Prices and shareholder welfare can move in opposite directions, so the former may be an invalid proxy for the latter. Increasing liquidity can reduce welfare, because it allows extreme shareholders to gain more weight in voting. Delegating decision-making to the board can improve shareholder value. However, the optimal board is biased, does not represent current shareholders, and may not garner support from the majority of shareholders.
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Keywords: Corporate Governance, Voting, Shareholder Rights, Trading, Delegation
JEL Classification: D74, D83, G34, K22
Suggested Citation: Suggested Citation