The Wall Street Stampede: Exit as Governance with Interacting Blockholders
75 Pages Posted: 23 Oct 2019 Last revised: 10 Jan 2022
Date Written: December 15, 2021
The growth of the asset management industry has made it commonplace for firms to have multiple institutional blockholders. In such firms, the strength of governance via exit depends on how blockholders react to each other's exit. We present a model to show that open-ended institutional investors such as mutual funds react strongly to an informed blockholder's exit, leading to correlated exits that enhance corporate governance. Our analysis points to a new role for mutual funds in corporate governance. We examine the trades of mutual funds around exits by activist hedge funds to present large-sample evidence consistent with our model.
Keywords: institutional investors, competition for flow, exit governance, correlated trading
JEL Classification: G23, G34
Suggested Citation: Suggested Citation