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Session Overview
CFGT-1: Shareholder Activism
Thursday, 24/Aug/2017:
8:30am - 10:00am

Session Chair: Amil Dasgupta, London School of Economics
Location: O129

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Blockholder Voting

Heski Bar-Isaac1, Joel Shapiro2

1University of Toronto; 2University of Oxford

Discussant(s): Chong Huang (UC Irvine)

By introducing a shareholder with many votes (a blockholder) to a standard model of voting, we uncover several surprising results. First, if a blockholder is unbiased, she may not vote with all of her shares. This is efficient, as it prevents her vote from drowning out the information provided by other votes. Second, if this blockholder can announce her vote before the vote takes place, other shareholders may ignore their information and vote with the blockholder to support her superior information. Third, if the blockholder is biased, some shareholders will try to counter the blockholder's vote. This effect can make a biased blockholder abstain. The above results suggest that regulations discouraging or prohibiting abstention, strategic behavior, and/or coordination may reduce efficiency.

EFA2017-457-CFGT-1-Bar-Isaac-Blockholder Voting.pdf

Portfolio Size and the Incentives for Shareholder Activism

G√ľnter Strobl, Jing Zeng

Frankfurt School of Finance and Management

Discussant(s): Sergei Kovbasyuk (Einaudi Institute for Economics and Finance)

We analyze the investment strategy of an activist investor in a multi-firm setting in which both an intervention in a firm's operations and the threat of an intervention can improve firm value. If the value of the activist's intervention is not immediately observable to investors, we find that the activist's incentive to maximize the market value of her portfolio leads her to choose an inefficient intervention policy. In particular, we demonstrate that, compared to the first-best intervention strategy, the activist conducts too many (too few) interventions when her ability to conduct a value-enhancing intervention is low (high). A skilled activist can mitigate this inefficiency by increasing the number of firms in her portfolio. This is because a larger portfolio dilutes the threat of an intervention imposed on each firm, thereby lowering the value of the firm under the incumbent management which strengthens the activist's incentive to conduct an intervention. Our analysis thus predicts that more capable activists invest in more firms, even when their capacity to intervene in the operations of these firms is limited.

EFA2017-920-CFGT-1-Strobl-Portfolio Size and the Incentives for Shareholder Activism.pdf

Proxy Advisory Firms: The Economics of Selling Information to Voters

Andrey Malenko1, Nadya Malenko2

1Massachusetts Institute of Technology; 2Boston College

Discussant(s): Thierry Foucault (HEC Paris)

We analyze how proxy advisors, which sell voting recommendations to shareholders, affect corporate decision-making. If the quality of the advisor's information is low, there is overreliance on its recommendations and insufficient private information production. In contrast, if the advisor's information is precise, it may be underused because the advisor rations its recommendations to maximize profits. Overall, the advisor's presence leads to more informative voting only if its information is sufficiently precise. We evaluate several proposals on regulating proxy advisors and show that some suggested policies, such as reducing proxy advisors' market power or decreasing litigation pressure, can have negative effects.

EFA2017-1409-CFGT-1-Malenko-Proxy Advisory Firms.pdf

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