In extant work on information acquisition and governance, the value of information is related only to the impact of a shareholder’s vote on corporate policies. We consider a setting where shareholders can vote and trade. The incentives to acquire information are higher, but the opportunity to generate trading rents distorts voting incentives and reduces the quality of governance for any fixed level of information acquisition. These negative incentives are stronger when more voters are informed and eventually dominate the gains from more information acquisition by shareholders. As a result, the quality of firm governance is eventually decreasing in the fraction of shareholders that become informed. One takeaway is that concerns that proxy advisors may crowd out information acquisition and reduce governance quality seem overstated. Turning to the role of transparency, we show that if the market can only learn whether a motion passed as opposed to the exact voting tally, then opportunities to trade do not cause these distortions, and governance is dramatically improved. Accordingly, the analysis provides a rationale for reducing transparency in governance.

The equity lending and option markets both allow investors to decouple voting and cash flow rights of common shares. We provide a theory of this decoupling. While either market enables investors to acquire voting rights without cash flow exposure, empirical studies demonstrate a substantial difference in implied vote prices. Our model explains this surprising difference by showing that vote prices in the equity lending market are endogenously lower than those implied by the option market. Nonetheless, we show that even though votes are cheaper in the equity lending market, activists endogenously choose to decouple using both markets.

This paper develops a unified theory of blockholder governance and the voting premium. It explains how a voting premium emerges when a minority blockholder tries to influence the composition of the shareholder base, in a setting without takeovers and controlling shareholders. The model shows that empirical measures of the voting premium generally do not reflect the value of voting rights, and that the voting premium can be negligible even when the allocation of voting rights is important. Moreover, the model can explain a negative voting premium, which has been documented in several studies. It arises because of free-riding by dispersed shareholders on the blockholder's trades, which increases the price impact of trading voting shares and makes them less liquid than non-voting shares. The model also has novel implications for the relationship between the voting premium and the severity of conflicts of interest between shareholders, the price of a separately traded vote, and competition for control among blockholders.