Voting and Trading: The Shareholder’s Dilemma

Paper

Shaoting Pi
Author: Shaoting Pi

Nbr. Publication(s): 1
Position: Assistant professor
Affiliation: Iowa State University
Member of PolEconFin since: 08 Sep 2021

We study firm governance when shareholders strategically vote and buy/sell shares. We find that voting for the better policy maximizes portfolio value only when pivotal; otherwise, it is better to vote against one’s information, distort the market, and then trade at the distorted price. In equilibrium, voting informativeness balances these forces and is demonstrably low. As the number of shareholders grows, the probability of making the correct decision is lower than the informational quality of just one shareholder’s private signal. Despite this, shareholders obtain value from their information in the form of rent extraction from trading.

We study firm governance when shareholders strategically vote and buy/sell shares. We find that voting for the better policy maximizes portfolio value only when pivotal; otherwise, it is better to vote against one’s information, distort the market, and then trade at the distorted price. In equilibrium, voting informativeness balances these forces and is demonstrably low. As the number of shareholders grows, the probability of making the correct decision is lower than the informational quality of just one shareholder’s private signal. Despite this, shareholders obtain value from their information in the form of rent extraction from trading.

Co-Author(s): Adam Meirowitz

# Tags: Common-values | Condorcet Jury Theorem | Shareholder voting | Strategic voting | corporate governance | information aggregation

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