IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/13870.html
   My bibliography  Save this paper

The Wall Street Stampede: Exit as Governance with Interacting Blockholders

Author

Listed:
  • Dasgupta, Amil
  • Cvijanovic, Dragana
  • Zachariadis, Konstantinos

Abstract

In firms with multiple blockholders governance via exit is affected by how blockholders react to each others' exit. Institutional investors, who hold the majority of equity blocks, are heterogeneous in their incentives. How do these incentives affect the manner in which institutional blockholders respond to each others' exit? We present a model that shows that open-ended institutional investors, who are subject to investor redemption risk, will be sensitive to an informed blockholder's exit, giving rise to correlated exits and strengthening governance. Thus, exposure to redemption risk, universally a negative force in asset pricing, plays a positive role in corporate governance. Using data on engagement campaigns by activist hedge funds we present large-sample evidence consistent with our theoretical mechanism.

Suggested Citation

  • Dasgupta, Amil & Cvijanovic, Dragana & Zachariadis, Konstantinos, 2019. "The Wall Street Stampede: Exit as Governance with Interacting Blockholders," CEPR Discussion Papers 13870, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13870
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP13870
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Naveen Khanna & Richmond D. Mathews, 2011. "Can herding improve investment decisions?," RAND Journal of Economics, RAND Corporation, vol. 42(1), pages 150-174, March.
    2. Simi Kedia & Laura T. Starks & Xianjue Wang, 2021. "Institutional Investors and Hedge Fund Activism," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 10(1), pages 1-43.
    3. Jongha Lim & Berk A. Sensoy & Michael S. Weisbach, 2016. "Indirect Incentives of Hedge Fund Managers," Journal of Finance, American Finance Association, vol. 71(2), pages 871-918, April.
    4. Peter Iliev & Michelle Lowry, 2015. "Are Mutual Funds Active Voters?," The Review of Financial Studies, Society for Financial Studies, vol. 28(2), pages 446-485.
    5. Vikas Agarwal & Naveen D. Daniel & Narayan Y. Naik, 2009. "Role of Managerial Incentives and Discretion in Hedge Fund Performance," Journal of Finance, American Finance Association, vol. 64(5), pages 2221-2256, October.
    6. Alex Edmans, 2009. "Blockholder Trading, Market Efficiency, and Managerial Myopia," Journal of Finance, American Finance Association, vol. 64(6), pages 2481-2513, December.
    7. Marco Becht & Julian Franks & Jeremy Grant & Hannes F. Wagner, 2017. "Returns to Hedge Fund Activism: An International Study," The Review of Financial Studies, Society for Financial Studies, vol. 30(9), pages 2933-2971.
    8. Brav, Alon & Jiang, Wei & Kim, Hyunseob, 2010. "Hedge Fund Activism: A Review," Foundations and Trends(R) in Finance, now publishers, vol. 4(3), pages 185-246, March.
    9. Dasgupta, Amil & Fos, Vyacheslav & Sautner, Zacharias, 2021. "Institutional investors and corporate governance," LSE Research Online Documents on Economics 112114, London School of Economics and Political Science, LSE Library.
    10. Mariassunta Giannetti & Xiaoyun Yu, 2021. "Adapting to Radical Change: The Benefits of Short-Horizon Investors," Management Science, INFORMS, vol. 67(7), pages 4032-4055, July.
    11. JOSEPH A. McCAHERY & ZACHARIAS SAUTNER & LAURA T. STARKS, 2016. "Behind the Scenes: The Corporate Governance Preferences of Institutional Investors," Journal of Finance, American Finance Association, vol. 71(6), pages 2905-2932, December.
    12. Ian R. Appel & Todd A. Gormley & Donald B. Keim, 2016. "Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism," NBER Working Papers 22707, National Bureau of Economic Research, Inc.
    13. Edwin J. Elton & Martin J. Gruber & Christopher R. Blake, 2003. "Incentive Fees and Mutual Funds," Journal of Finance, American Finance Association, vol. 58(2), pages 779-804, April.
    14. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
    15. Nickolay Gantchev & Oleg R Gredil & Chotibhak Jotikasthira, 2019. "Governance under the Gun: Spillover Effects of Hedge Fund Activism," Review of Finance, European Finance Association, vol. 23(6), pages 1031-1068.
    16. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    17. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    18. Sreedhar T. Bharath & Sudarshan Jayaraman & Venky Nagar, 2013. "Exit as Governance: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 68(6), pages 2515-2547, December.
    19. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-479, June.
    20. Anat R. Admati & Paul Pfleiderer, 2009. "The "Wall Street Walk" and Shareholder Activism: Exit as a Form of Voice," The Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2445-2485, July.
    21. Edmans, Alex & Holderness, Clifford, 2016. "Blockholders: A Survey of Theory and Evidence," CEPR Discussion Papers 11442, C.E.P.R. Discussion Papers.
    22. Alon Brav & Wei Jiang & Frank Partnoy & Randall Thomas, 2008. "Hedge Fund Activism, Corporate Governance, and Firm Performance," Journal of Finance, American Finance Association, vol. 63(4), pages 1729-1775, August.
    23. Doron Levit, 2019. "Soft Shareholder Activism," The Review of Financial Studies, Society for Financial Studies, vol. 32(7), pages 2775-2808.
    24. Fung, William & Hsieh, David A., 1999. "A primer on hedge funds," Journal of Empirical Finance, Elsevier, vol. 6(3), pages 309-331, September.
    25. Shleifer, Andrei & Vishny, Robert W, 1997. "The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    26. Amil Dasgupta & Vyacheslav Fos & Zacharias Sautner, 2021. "Institutional Investors and Corporate Governance," Foundations and Trends(R) in Finance, now publishers, vol. 12(4), pages 276-394, September.
    27. Agarwal, Vikas & Daniel, Naveen D. & Naik, Narayan Y., 2009. "Role of managerial incentives and discretion in hedge fund performance," CFR Working Papers 04-04, University of Cologne, Centre for Financial Research (CFR).
    28. Brian J. Bushee, 2001. "Do Institutional Investors Prefer Near†Term Earnings over Long†Run Value?," Contemporary Accounting Research, John Wiley & Sons, vol. 18(2), pages 207-246, June.
    29. Alex Edmans & Gustavo Manso, 2011. "Governance Through Trading and Intervention: A Theory of Multiple Blockholders," The Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2395-2428.
    30. Altı, Aydoğan & Kaniel, Ron & Yoeli, Uzi, 2012. "Why do institutional investors chase return trends?," Journal of Financial Intermediation, Elsevier, vol. 21(4), pages 694-721.
    31. Khorana, Ajay & Servaes, Henri & Wedge, Lei, 2007. "Portfolio manager ownership and fund performance," Journal of Financial Economics, Elsevier, vol. 85(1), pages 179-204, July.
    32. Jeremy C. Stein, 2002. "Information Production and Capital Allocation: Decentralized versus Hierarchical Firms," Journal of Finance, American Finance Association, vol. 57(5), pages 1891-1921, October.
    33. Dasgupta, Amil & Piacentino, Giorgia, 2015. "The Wall Street walk when blockholders compete for flows," LSE Research Online Documents on Economics 63144, London School of Economics and Political Science, LSE Library.
    34. Amil Dasgupta & Giorgia Piacentino, 2015. "The Wall Street Walk when Blockholders Compete for Flows," Journal of Finance, American Finance Association, vol. 70(6), pages 2853-2896, December.
    35. Bushee, BJ & Noe, CF, 2000. "Corporate disclosure practices, institutional investors, and stock return volatility," Journal of Accounting Research, Wiley Blackwell, vol. 38, pages 171-202.
    36. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
    37. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    38. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. "Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
    39. Khanna, Naveen & Sonti, Ramana, 2004. "Value creating stock manipulation: feedback effect of stock prices on firm value," Journal of Financial Markets, Elsevier, vol. 7(3), pages 237-270, June.
    40. Dasgupta, Amil & Brav, Alon & Mathews, Richmond, 2016. "Wolf Pack Activism," CEPR Discussion Papers 11507, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sanggyu Kang & Chune Young Chung & Amirhossein Fard, 2024. "Does geographic or market proximity matter? Evidence from institutional investor monitoring on earnings attributes in US cross‐listed stocks," Bulletin of Economic Research, Wiley Blackwell, vol. 76(2), pages 443-469, April.
    2. Corum, Adrian Aycan, 2021. "Fighting Fire with Fire: Optimality of Value Destruction to Mitigate Short-Termism," OSF Preprints xhwmg, Center for Open Science.
    3. Greppmair, Stefan & Jank, Stephan & Saffi, Pedro A. C. & Sturgess, Jason, 2024. "Securities lending and information acquisition," Discussion Papers 08/2024, Deutsche Bundesbank.
    4. Dasgupta, Amil & Fos, Vyacheslav & Sautner, Zacharias, 2021. "Institutional investors and corporate governance," LSE Research Online Documents on Economics 112114, London School of Economics and Political Science, LSE Library.
    5. Corum, Adrian Aycan & Malenko, Andrey & Malenko, Nadya, 2020. "Corporate Governance in the Presence of Active and Passive Delegated Investment," OSF Preprints 8n6xj, Center for Open Science.
    6. Wang, Liang, 2023. "Mitigating firm-level political risk in China: The role of multiple large shareholders," Economics Letters, Elsevier, vol. 222(C).
    7. Caselli, Stefano & Gatti, Stefano & Chiarella, Carlo & Gigante, Gimede & Negri, Giulia, 2023. "Do shareholders really matter for firm performance? Evidence from the ownership characteristics of Italian listed companies," International Review of Financial Analysis, Elsevier, vol. 86(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dasgupta, Amil & Fos, Vyacheslav & Sautner, Zacharias, 2021. "Institutional investors and corporate governance," LSE Research Online Documents on Economics 112114, London School of Economics and Political Science, LSE Library.
    2. Dasgupta, Amil & Piacentino, Giorgia, 2015. "The Wall Street walk when blockholders compete for flows," LSE Research Online Documents on Economics 63144, London School of Economics and Political Science, LSE Library.
    3. Edmans, Alex & Holderness, Clifford, 2016. "Blockholders: A Survey of Theory and Evidence," CEPR Discussion Papers 11442, C.E.P.R. Discussion Papers.
    4. Wang, Xiaoqiong & Zhen, Hongxian & Zhu, Feifei, 2023. "Voting with their feet: Controlling shareholders' share pledging and other major shareholders' strategic response," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    5. Dasgupta, Amil & Brav, Alon & Mathews, Richmond, 2016. "Wolf Pack Activism," CEPR Discussion Papers 11507, C.E.P.R. Discussion Papers.
    6. Crane, Alan D. & Koch, Andrew & Michenaud, Sébastien, 2019. "Institutional investor cliques and governance," Journal of Financial Economics, Elsevier, vol. 133(1), pages 175-197.
    7. Chang, Eric C. & Lin, Tse-Chun & Ma, Xiaorong, 2020. "Governance through trading on acquisitions of public firms," Journal of Corporate Finance, Elsevier, vol. 65(C).
    8. Travis L. Johnson & Nathan Swem, 2017. "Reputation and Investor Activism: A Structural Approach," Finance and Economics Discussion Series 2017-036r1, Board of Governors of the Federal Reserve System (U.S.), revised 15 Oct 2020.
    9. Yangyang Chen & Rui Ge & Henock Louis & Leon Zolotoy, 2019. "Stock liquidity and corporate tax avoidance," Review of Accounting Studies, Springer, vol. 24(1), pages 309-340, March.
    10. Mariassunta Giannetti & Xiaoyun Yu, 2021. "Adapting to Radical Change: The Benefits of Short-Horizon Investors," Management Science, INFORMS, vol. 67(7), pages 4032-4055, July.
    11. Craig W. Holden & Stacey Jacobsen & Avanidhar Subrahmanyam, 2014. "The Empirical Analysis of Liquidity," Foundations and Trends(R) in Finance, now publishers, vol. 8(4), pages 263-365, December.
    12. Caselli, Stefano & Gatti, Stefano & Chiarella, Carlo & Gigante, Gimede & Negri, Giulia, 2023. "Do shareholders really matter for firm performance? Evidence from the ownership characteristics of Italian listed companies," International Review of Financial Analysis, Elsevier, vol. 86(C).
    13. Schmidt, Cornelius & Fahlenbrach, Rüdiger, 2017. "Do exogenous changes in passive institutional ownership affect corporate governance and firm value?," Journal of Financial Economics, Elsevier, vol. 124(2), pages 285-306.
    14. Farizo, Joseph D., 2022. "(Black)Rock the vote: Index funds and opposition to management," Journal of Corporate Finance, Elsevier, vol. 76(C).
    15. Kerry Back & Pierre Collin‐Dufresne & Vyacheslav Fos & Tao Li & Alexander Ljungqvist, 2018. "Activism, Strategic Trading, and Liquidity," Econometrica, Econometric Society, vol. 86(4), pages 1431-1463, July.
    16. Peter Iliev & Jonathan Kalodimos & Michelle Lowry, 2021. "Investors’ Attention to Corporate Governance [The “Wall Street Walk” and shareholder activism: Exit as a form of voice]," The Review of Financial Studies, Society for Financial Studies, vol. 34(12), pages 5581-5628.
    17. Amil Dasgupta & Giorgia Piacentino, 2011. "The Wall Street Walk when Blockholders Compete for Flows," FMG Discussion Papers dp692, Financial Markets Group.
    18. Corum, Adrian Aycan & Malenko, Andrey & Malenko, Nadya, 2020. "Corporate Governance in the Presence of Active and Passive Delegated Investment," OSF Preprints 8n6xj, Center for Open Science.
    19. Simon Döring & Wolfgang Drobetz & Sadok El Ghoul & Omrane Guedhami & Henning Schröder, 2021. "Institutional investment horizons and firm valuation around the world," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 52(2), pages 212-244, March.
    20. Marco Becht & Julian Franks & Jeremy Grant & Hannes F. Wagner, 2017. "Returns to Hedge Fund Activism: An International Study," The Review of Financial Studies, Society for Financial Studies, vol. 30(9), pages 2933-2971.

    More about this item

    Keywords

    Corporate governance; Institutional investors; Exit; Herding;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:13870. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.