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Traditional theories argue that governance is strongest under a single large blockholder, as she has large incentives to undertake value-enhancing interventions. However, most firms are held by multiple small blockholders.
This paper shows that, while such a structure generates free-rider problems that hinder intervention, the same co-ordination difficulties strengthen a second governance mechanism: disciplining the manager through trading. Since multiple blockholders cannot co-ordinate to limit their orders and maximize combined trading profits, they trade competitively, impounding more information into prices. This strengthens the threat of disciplinary trading, inducing higher managerial effort. The optimal blockholder structure depends on the relative effectiveness of manager and blockholder effort, the complementarities in their outputs, information asymmetry, liquidity, monitoring costs, and the manager's contract.
This paper develops a theory of blockholder governance and the voting premium. A blockholder and dispersed shareholders first trade in a competitive...
This Article offers a theory of mutual fund voting to answer when mutual funds should vote on behalf of their investors and when they should not. It argues...