The Wall Street Walk when Blockholders Compete for Flows

Abstract

Effective monitoring by equity blockholders is important for good corporate governance. A prominent theoretical literature argues that the threat of block sale ("exit") can be an effective governance mechanism. Many blockholders are money managers. We show that when money managers compete for investor capital, the threat of exit loses credibility, weakening its governance role. Money managers with more skin in the game will govern more successfully using exit. Allowing funds to engage in activist measures ("voice") does not alter our qualitative results. Our results link widely prevalent incentives in the ever-expanding money management industry to the nature of corporate governance. Equity blockholders in publicly traded corporations who are dissatisfied with the actions of company management can sell their blocks-the so-called "Wall Street Walk." A growing

Behind the Scenes: The Corporate Governance Preferences of Institutional Investors

“…In his model, exit and voice are complements because the possibility of exiting improves the ability of an activist to influence the manager. Similarly, Dasgupta and Piacentino (2015) show that exit and voice can complement each other. In their model, voice comes in the form of costly shareholder proposals and managers only listen to shareholders if voice is backed up by the threat of exit.…”

“…Indeed, tracking error considerations might force investors to buy shares in situations in which they would prefer to sell. Dasgupta and Piacentino (2015) show that the threat of exit can also be weaker if institutional investors care about investor flows (e.g., if the ultimate investors chase short-term performance). Thus, investors might not sell for fear that doing so would make their clients think that they initially bought the wrong stocks.…”

Exit as Governance: An Empirical Analysis

“…Ex post blockholder longevity may not be a good indicator of ex ante intent, because ex post longevity depends both on the blockholder's liquidity shock and actual firm performance. Table V suggests an alternative way of classifying blockholder intent to stay with the firm: ESOP and directors are likely to have an ex ante interest in staying with the firm, unlike, for example, fund manager blockholders who are subject to short-term flows (Dasgupta and Piacentino (2012)). The significant results in Table V for director/ESOP blockholders further bolsters an exit threat interpretation of our findings.…”

Activism, Strategic Trading, and Liquidity

“…Another strand of the literature on trading and activism that is tangentially related to our paper is the literature on "governance by exit," which includes the papers by Admati and Pfleiderer (2009), Edmans (2009), Edmans and Manso (2011, and Dasgupta and Piacentino (2015). In these models, a blockholder has access to private information about firm value and may sell her block on negative information.…”