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Shareholder Heterogeneity and Corporate Governance

Paper Session

Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM

Loews Philadelphia, Commonwealth Hall B
Hosted By: American Finance Association
  • Chair: Martin Schmalz, University of Michigan

Effects of Common Ownership on Customer-Supplier Relationships

Kayla Freeman
,
Indiana University

Abstract

The increasing prevalence of institutional ownership of corporate equity creates many cases where two firms are owned by the same institutional investors. If these two firms have the ability to influence each other's profits, the presence of common owners can affect how the firms interact, since they share the goal of maximizing the wealth of the same owners. In this study, I address whether common ownership (defined as the extent to which firms are held by the same institutional investors) in customer firms and supplier firms strengthens supply chain relationships. I find common ownership increases the longevity of customer-supplier relationships. These results are stronger in cases where theory predicts the trade relationships are more likely to be plagued by supply chain frictions. Using an instrument constructed around a shock to common ownership due to a large mutual fund scandal in 2003, I find evidence that the relationship between common ownership and vertical relationship strength is causal.

Institutional Investors and Hedge Fund Activism

Simi Kedia
,
Rutgers University
Laura Starks
,
University of Texas-Austin
Xianjue Wang
,
Rutgers University

Abstract

Due to their relatively small holdings in a target firm, hedge funds activists need the cooperation of other investors, generally institutional owners who can have a significant impact on the success of the activist’s campaign. We develop three measures of institutional ownership that reflects likelihood of activist support. Over the 2004-2012 sample period, we find that the friendly institutional owners are associated with higher stock returns (both short term and long term) and higher operating performance of the target firm. Consistent with these investors being valuable to activists, we find that ownership by activism-friendly institutions also significantly increases the likelihood of being targeted by hedge fund activists. The paper is one of the first to document that composition of institutional ownership has a significant impact on the likelihood of and value created from hedge fund activism.

Blockholder Voting

Heski Bar-Isaac
,
University of Toronto
Joel Shapiro
,
University of Oxford

Abstract

By introducing a shareholder with many votes (a blockholder) into a standard voting model, we uncover striking results. First, an unbiased blockholder may not vote with all of her shares. This is efficient because it prevents her from drowning out the information in others' votes. Second, if this blockholder announces her vote upfront, shareholders may ignore their information and vote with the blockholder to support her superior information. The results are robust to permitting information acquisition and trade. We also show that shareholders may coordinate to oppose a blockholder who is biased. Regulations discouraging abstention, strategic behavior, and/or coordination reduce efficiency.

Free-riders and Underdogs: Participation in Corporate Voting

Dragana Cvijanovic
,
University of North Carolina-Chapel Hill
Moqi Groen-Xu
,
London School of Economics
Konstantinos E. Zachariadis
,
Queen Mary University of London

Abstract

This paper studies voting participation in a corporate context. We show in a rational-choice model how shareholder heterogeneity and preferences affect their decision to vote. We exhibit a free-rider effect (agreement among shareholders leads to less participation) and an underdog effect (disagreement leads to more participation). Participation rates contain information about the importance of proposals to shareholders. The model produces a formula that allows us to estimate the implied importance controlling for ownership structure. We use the formula to document novel stylized facts in a sample of 18,520 corporate voting proposals of US firms: shareholder proposals are perceived as more important than management proposals, and the most important shareholder proposals are about restructuring.
Discussant(s)
Charles Hadlock
,
Michigan State University
Nickolay Gantchev
,
Southern Methodist University
Ernst Maug
,
University of Mannheim
Nadya Malenko
,
Boston College
JEL Classifications
  • G3 - Corporate Finance and Governance