Trading and Shareholder Democracy
57 Pages Posted: 3 Oct 2019 Last revised: 4 Mar 2020
Date Written: January 27, 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. Increasing liquidity may reduce prices and welfare, because it allows extreme shareholders to gain more weight in voting. Prices and welfare can move in opposite directions, so the former are an invalid proxy for the latter. 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.
Keywords: Corporate Governance, Voting, Shareholder Rights, Trading, Delegation
JEL Classification: D74, D83, G34, K22
Suggested Citation: Suggested Citation