Weak Governance by Informed Large Shareholders

Weak Governance by Informed Large Shareholders

Eitan Goldman, Wenyu Wang

Series number :

Serial Number: 
469/2016

Date posted :

April 01 2016

Last revised :

May 12 2016
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Keywords

  • takeovers • 
  • Large shareholders • 
  • institutional investors • 
  • Informed Trading

A commonly held belief is that better informed large shareholders with greater voting power improve corporate governance. We argue that this may not be true in general and demonstrate our argument in a model of corporate takeovers.

We show that a large shareholder?s ability to collect information and trade ex post may cause him to vote ex ante in favor of pursuing takeovers, even if such takeovers generate a negative expected return. We test the model?s main predictions regarding how institutional investors trade around corporate takeovers. Consistent with the model, we find that institutional investors increase their holdings in firms that subsequently pursue acquisitions with greater performance variability and that following takeover initiation, institutional trading positively correlates with long-run deal performance. We further document that these trading patterns are more pronounced when the institutional investor has larger initial holdings of acquirer shares, when the acquirer accounts for a larger fraction of the institution?s portfolio, and when the institutional investor demonstrates better trading ability prior to acquisitions. Overall, our study sheds light on the limits of relying on better informed large shareholders to improve corporate governance.

Authors

Real name: 
Wenyu Wang