When Shareholders Disagree: Trading After Shareholder Meetings

Shareholder voting has become one of the main avenues through which shareholders participate in corporate governance, and it is frequently the only opportunity offered to shareholders to articulate their views. Shareholders have become increasingly vocal in expressing their views on board composition, firm policies, and, most importantly, executive compensation. The public discussion and the research literature have both emphasized the tensions between corporate managers and shareholders on these issues and focused on the role of shareholders in disciplining entrenched managers. Our paper shows that this may be a serious omission, because often shareholders do not only disagree with management, but also with each other. Many votes at shareholder meetings – including those on evidently routine issues – have a small minority that disagrees with the majority vote.

We investigate disagreement among shareholders and show three important results. First, dissenting shareholders who find themselves in the minority tend to sell shares and reduce their holdings in the firm after the vote. Second, shareholder meetings are consistently followed by extended periods, typically about four weeks, in which trading volume in the firm is significantly above pre-vote levels. Third, while volatility increases around shareholder meetings, the increase in trading volume is largely dissociated from changes in the stock price. From the point of view of conventional models of shareholder voting, all three findings are puzzling. These models attribute disagreements between shareholders either to conflicts of interests between shareholders or to differential access to information. We show that neither of these models can explain our findings. Instead, we suggest a different explanation, which has as yet to gain traction in the literature on corporate governance: Shareholders simply hold different views about “how the world works,” i.e. they have different models, or “visions,” through which they interpret new information and evaluate which strategies are optimal for the firm. Critically, this approach assumes that shareholders may look at the same public information and interpret it differently. Our paper looks at a number of models that built on this notion and tests their empirical implications. We provide significant evidence consistent with this “difference of visions” approach.

Our findings provide a new perspective on corporate governance. The conventional focus on the different interests of shareholders and management emphasizes the alignment of incentives and increased disclosure to bridge conflicts of interests. Our results imply that these measures may be of little help to improve cohesive decision-making in corporations. Increased disclosure may provide more information on the interpretation of which shareholders disagree, leading to more divergent viewpoints. Moreover, incentive alignment does not address differences based on different opinions. Instead, our findings emphasize the importance of trading: When dissenting shareholders who disagree with the majority sell, then trading contributes to the formation of a more cohesive shareholder base, which may be important for decision-making in the firm.