Shareholder Rights

Abstract

‘Shareholder rights’ are the legal entitlements of shareholders via-a-vis companies in which they invest. A large body of research has sought to investigate how shareholder rights foster accountability of controllers. The concern has been that without accountability, managers and dominant shareholders will use their power to further their own interests at the expense of outside investors. A contrasting concern is that strengthening shareholder rights may come at the expense of other parties, which may also lead to misallocation of corporate resources. A recently-emerging body of research suggests that the relationship between shareholder rights and social welfare is not monotonic, but rather inverse-U shaped. We argue that the calibration and impact of shareholder rights depends crucially on the institutional channel(s) through which they are implemented – voting, litigation, and/or market pricing. In particular, the market pricing channel intensifies the effects of shareholder rights in ways that can be excessive. This can harm not only other constituencies but also shareholders, as it can promote short-termism and systemic externalities. These problems are less pronounced for shareholder rights implemented through the voting channel.

Keywords: shareholder rights, corporate governance, agency costs, corporate law, law and finance, externalities, short-termism

JEL Classification: G32, G34, G38, H23, K22, M14, O16