This paper studies how directors' reputational concerns affect board structure, corporate governance, and firm value. In our setting, directors affect their firms' governance, and governance in turn ...affects firms' demand for new directors. Whether the labor market rewards a shareholder-friendly or management-friendly reputation is determined in equilibrium and depends on aggregate governance. We show that directors' desire to be invited to other boards creates strategic complementarity of corporate governance across firms. Directors' reputational concerns amplify the governance system: strong systems become stronger and weak systems become weaker. We derive implications for multiple directorships, board size, transparency, and board independence.
The last forty years have seen two major economic trends: wages have stalled despite rising productivity, and institutional investors have replaced retail shareholders as the predominant owners of ...the U.S. equity markets. A few powerful institutional investors-dubbed common owners-now hold large stakes in most U.S. corporations. And in no coincidence, when U.S. workers acquired this new set of bosses, their wages stopped growing while shareholder returns increased. This Article explains how common owners shift wealth from labor to capital, thereby exacerbating income inequality.
Powerful institutional investors pushing public corporations en masse to adopt strong corporate governance has an inherent, painful tradeoff. While strong governance can improve corporate efficiency by reducing management agency costs, it can also reduce social welfare by limiting investment and thus hiring. Common owners act as a wage cartel, pushing labor prices below their competitive level. Importantly, common owners transfer wealth from workers to shareholders not by actively pursuing anticompetitive measures but rather by allocating more control to shareholders-control that can then be exercised by other shareholders, such as hostile raiders and activist hedge funds. If policymakers wish to restore the equilibrium that existed before common ownership dominated the market, they should break up institutional investors by limiting their size.
Soft Shareholder Activism Levit, Doron
Review of financial studies/The Review of financial studies,
07/2019, Letnik:
32, Številka:
7
Journal Article
Recenzirano
Odprti dostop
This paper studies communications between investors and firms as a form of corporate governance. Activist investors cannot force their ideas on companies; they must persuade the board or other ...shareholders that implementing these ideas is beneficial to the firm. I show that the threat of voice (i.e., launching a public campaign) facilitates communication, whereas the option to exit facilitates communication if and only if the proposal is risky relative to the status quo or voice is ineffective as a governance mechanism. The analysis identifies factors that contribute to successful dialogues between investors and firms.
Information and control rights are central aspects of leadership, management, and corporate governance. This paper studies a principal-agent model that features both communication and intervention as ...alternative means to exert influence. The main result shows that a principal's power to intervene in an agent's decision limits the ability of the principal to effectively communicate her private information. The perverse effect of intervention on communication can harm the principal, especially when the cost of intervention is low or the underlying agency problem is severe. These novel results are applied to managerial leadership, corporate boards, private equity, and shareholder activism.
This paper studies the advisory role of the board of directors in takeovers. I develop a model in which the takeover premium and the ability of the target board to resist the takeover are endogenous. ...The analysis relates the influence of the board on target shareholders and the reaction of the market to its recommendations to various characteristics of the acquirer and the target. I also show that the expected target shareholder value can decrease with the expertise of the board and it is maximized when the board is biased against the takeover. Generally, uninformative and ignored recommendations are not necessarily evidence that the target board has no influence on the outcome of the takeover. Perhaps surprisingly, under the optimal board structure, target shareholders ignore the recommendations of the board, which are never informative in equilibrium.
Governance Under Common Ownership Edmans, Alex; Levit, Doron; Reilly, Devin
Review of financial studies/The Review of financial studies,
07/2019, Letnik:
32, Številka:
7
Journal Article
Recenzirano
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Conventional wisdom is that diversification weakens governance by spreading investors too thinly. We show that, when investors own multiple firms (“common ownership”), governance through both voice ...and exit can strengthen—even if the firms are in unrelated industries. Under common ownership, informed investors have flexibility over which assets to sell upon a liquidity shock. They sell low-quality firms first, thereby increasing price informativeness. In a voice model, investors’ incentives to monitor are stronger since “cutting and running” is less profitable. In an exit model, managers’ incentives to work are stronger since the price impact of investor selling is greater.
Shareholder proposals are a common form of shareholder activism. Voting for shareholder proposals, however, is nonbinding since management has the authority to reject the proposal even if it received ...majority support from shareholders. We analyze whether nonbinding voting is an effective mechanism for conveying shareholder expectations.We show that, unlike binding voting, nonbinding voting generally fails to convey shareholder views when manager and shareholder interests are not aligned. Surprisingly, the presence of an activist investor who can discipline the manager may enhance the advisory role of nonbinding voting only if conflicts of interest between shareholders and the activist are substantial.
Corporate control activism Corum, Adrian Aycan; Levit, Doron
Journal of financial economics,
07/2019, Letnik:
133, Številka:
1
Journal Article
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This paper studies the role of activist investors in the market for corporate control. Our theory proposes that activist investors have an inherent advantage relative to bidders in pressuring ...entrenched incumbents to sell. As counterparties to the acquisition, bidders have a fundamental conflict of interests with target shareholders from which activist investors are immune. Therefore, unlike activists, the ability of bidders to win proxy fights is very limited. This result is consistent with the large number of activist campaigns that have resulted with the target’s sale to a third party and the evidence that most proxy fights are launched by activists, not by bidders.
Trading and Shareholder Democracy Levit, Doron; Malenko, Nadya; Maug, Ernst
The Journal of finance (New York),
February 2024, Letnik:
79, Številka:
1
Journal Article
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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. Prices and shareholder welfare can move in opposite directions, so the former may be an invalid proxy for the latter. Relaxing trading frictions can reduce welfare because it allows extreme shareholders to gain more weight in voting. Delegating decision-making to the board can help overcome collective action problems at the voting stage. We also analyze the role of index investors and social concerns of shareholders.
One-size-fits-all recommendations are common in many contexts, including those with a widespread heterogeneity. We propose a model that rationalizes this phenomenon. An expert recommends publicly to ...two agents whether to adopt a policy. The expert is privately informed about agents’ payoffs from the policy and his conflict of interest. We show that one-size-fits-all recommendations can be informative even when payoffs are independent across agents. Such recommendations increase the expert’s influence by concealing his conflict of interest. We apply the model to recommendations provided by the IMF, World Bank, proxy advisory firms, central banks, and the Basel Committee. (JEL D82, E58, F33, F53, G28, G34)
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