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Institutional Investors and Governance

Paper Session

Tuesday, Jan. 5, 2021 12:15 PM - 2:15 PM (EST)

Hosted By: American Finance Association
  • Chair: Mariassunta Giannetti, Stockholm School of Economics

Corporate Governance in the Presence of Active and Passive Delegated Investment

Adrian Aycan Corum
,
Cornell University
Andrey Malenko
,
University of Michigan
Nadya Malenko
,
University of Michigan

Abstract

We examine the governance role of delegated portfolio managers. In our model, investors decide how to allocate their wealth between passive funds, active funds, and private savings, and fund fees are endogenously determined. Funds' ownership stakes and fees determine their incentives to engage in governance. Whether passive fund growth improves governance depends on whether it crowds out private savings or active funds. In the former case, it improves governance even though it is accompanied by lower fund fees, whereas in the latter case it can be detrimental to governance. Overall, passive fund growth improves governance only if it does not increase fund investors' returns too much. Regulations that decrease funds' costs of engagement can be opposed by both fund investors and fund managers even though they are value-increasing.

Trading and Shareholder Democracy

Doron Levit
,
University of Pennsylvania
Nadya Malenko
,
University of Michigan
Ernst Maug
,
University of Mannheim

Abstract

We study shareholder voting in a model in which trading affects the composition of the shareholder base. Trading and voting are complementary, which gives rise to self-fulfilling expectations about proposal acceptance and multiple equilibria. Increasing liquidity may reduce prices and welfare, because it allows extreme shareholders to gain more weight in voting. Prices and welfare can move in opposite directions, so the former are an invalid proxy for the latter. Delegating decision-making to the board can improve shareholder value. However, the optimal board is biased, does not represent current shareholders, and may not garner support from the majority of shareholders.

Active Short Selling by Hedge Funds

Ian Appel
,
Boston College
Vyacheslav Fos
,
Boston College

Abstract

We examine the role of strategic communication in short selling campaigns by hedge funds. Such campaigns are associated with abnormal returns for targets of approximately -7% as well as changes in the behavior of stakeholders (e.g., other short sellers). The effects are driven by campaigns that feature specific allegations rather than general claims of overvaluation. Campaigns are primarily undertaken by activist hedge funds, particularly those that have more experience or employ hostile tactics. Overall, our findings are consistent with models of strategic communication in which investor reputation and the credibility of allegations facilitate the flow of negative information into prices.
Discussant(s)
Alex Edmans
,
London Business School
John Matsusaka
,
University of Southern California
Pab Jotikasthira
,
Southern Methodist University
JEL Classifications
  • G3 - Corporate Finance and Governance