The Wall Street Stampede: Exit As Governance with Interacting Blockholders

71 Pages Posted: 23 Oct 2019 Last revised: 27 Oct 2019

See all articles by Dragana Cvijanovic

Dragana Cvijanovic

Cornell SC Johnson College of Business; Warwick Business School, University of Warwick

Amil Dasgupta

London School of Economics (LSE); European Corporate Governance Institute (ECGI)

Konstantinos E. Zachariadis

School of Economics and Finance, Queen Mary University of London

Multiple version iconThere are 2 versions of this paper

Date Written: July 2019

Abstract

In firms with multiple blockholders governance via exit is affected by how blockholders react to each others' exit. Institutional investors, who hold the majority of equity blocks, are heterogeneous in their incentives. How do these incentives affect the manner in which institutional blockholders respond to each others' exit? We present a model that shows that open-ended institutional investors, who are subject to investor redemption risk, will be sensitive to an informed blockholder's exit, giving rise to correlated exits and strengthening governance. Thus, exposure to redemption risk, universally a negative force in asset pricing, plays a positive role in corporate governance. Using data on engagement campaigns by activist hedge funds we present large-sample evidence consistent with our theoretical mechanism.

Keywords: institutional investors, competition for flow, governance via exit

JEL Classification: G23, G34

Suggested Citation

Cvijanovic, Dragana and Dasgupta, Amil and Zachariadis, Konstantinos E., The Wall Street Stampede: Exit As Governance with Interacting Blockholders (July 2019). European Corporate Governance Institute – Finance Working Paper No. 632/2019 , Available at SSRN: https://ssrn.com/abstract=3473877 or http://dx.doi.org/10.2139/ssrn.3473877

Dragana Cvijanovic (Contact Author)

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

Warwick Business School, University of Warwick ( email )

Coventry CV4 7AL
United Kingdom

Amil Dasgupta

London School of Economics (LSE) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7458 (Phone)
+44 20 7955 7420 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Konstantinos E. Zachariadis

School of Economics and Finance, Queen Mary University of London ( email )

Graduate Centre
Mile End Campus
London, E1 4NS
United Kingdom
+44 20 7882 8698 (Phone)

HOME PAGE: http://www.konstantinosezachariadis.com

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