The Wall Street Stampede: Exit As Governance with Interacting Blockholders

Institutional Investors and Corporate Governance

“…The corporate governance literature, discussed in Section 4, show that such flow incentives may weaken the incentives of mutual funds to govern via exit and voice (Dasgupta and Piacentino, 2015;Song, 2017). Recent papers nevertheless also demonstrate how flow incentives can generate subtle positive governance effects by inducing mutual funds to support activist hedge funds in their engagement efforts (Brav et al, 2021;Cvijanovic et al, 2019). The IAA's prohibition of asymmetric performance fees also makes it difficult for registered investment companies to tie fees to returns from specific governance activities that may -in principlegenerate high returns.…”

“…Finally, like Song (2017), Cvijanovic et al (2019) also focus on the interaction between different types of blockholders. They show that flow-sensitive blockholders may rush to sell out of a firm following the exit of an informed blockholder -potentially even ignoring their own information -fearing that they will otherwise be left invested in a firm that is likely to underperform, leading to outflow.…”

“…A key theme that emerges from the literature on dual-layered agency models is institutional investor heterogeneity. In Dasgupta and Piacentino (2015), Song (2017), andCvijanovic et al (2019) blockholders with differing incentives behave differently. Such differences in behaviour can lead to relevant interactions in governance as discussed above.…”

“…Third, the respondents state that exit threat effectiveness depends on whether other investors also exit for the same reason, the equity stake size of the investor, managerial ownership, and whether other large shareholders are also present -the importance of the exit decision by others is consistent with Cvijanovic et al (2019). Fourth, exit is seen as a governance mechanisms that complements voice (rather than substituting it), and intervention typically happens prior to a potential exit.…”

Securities Lending and Information Acquisition

“…Goldstein and Yang (2015) show that complementarities between information acquisition and trading amplify the effect of exogenous changes in the underlying information environment. Cvijanović et al (2019) show that complementarities in information acquisition and trading improve governance via exit.…”