by Professor Adam Meirowitz, Yale University and Dr Shaoting Pi, Research Associate, Cambridge Centre for Finance and Cambridge Endowment for Research in Finance
Starting with Marquis de Condorcet (1785), a large literature seeks to understand voting in settings where agents possess private information about the desirability of choices. A key intuition is the finding by Austen-Smith and Banks (1996) that equilibrium behaviour requires that in evaluating their information agents must also condition on the event that they are pivotal. This equilibrium phenomenon has been shown to lead to interesting distortions and accounting for these distortions is central to work on institutional design, for example, the choice of voting rule (Feddersen and Pesendorfer (1998), Duggan and Martinelli (2001), Meirowitz (2002)). Recent work seeks to understand how seemingly fine differences in the informational environment affect the nature of voting behaviour and whether information is efficiently aggregated when there are a large number of voters (Feddersen and Pesendorfer (1997), Bhattacharya (2013), Mandler (2012), Acharya and Meirowitz (2017)).
The connections between strategic voting (in political economy) and shareholder voting are natural. For instance, Maug (1998) introduces proxy voting to this framework. Maug and Rydqvist (2009) consider natural questions about shareholder control in this setting. Levit and Malenko (2011) and Ekmekci et al. (2019) explore non-binding voting. Malenko and Malenko (2019) add shareholder information acquisition from proxy advisory firms. Bar-Isaac and Shapiro (2020) study blockholder voting. Bond and Eraslan (2010) consider strategic voting over proposals that are strategically chosen. Brav and Mathews (2011) study the effects of empty voting by a single strategic actor that can acquire additional votes and then make call orders prior to voting. They show that there are incentives to deviate from one-share one vote and that the welfare consequences can go either way. Bouton et al. (2021) compare the informational efficiency of the one-share-one-vote mechanism (1S1V) and that of the one-person-one-vote mechanism (1P1V). Considering that management has the right to decide whether to put the proposal to a vote, they find that the higher voting efficiency of 1S1V implies worse selection incentives, and the negative effect of worse selection can outweigh the higher voting efficiency of 1S1V.
A critical difference between civic voting and shareholder voting is that shareholders can trade shares as well as vote. Recent literature considers the link between shareholders’ ability to vote and their opportunity to trade. Meirowitz and Pi (2022) find that voting for the better policy maximises a shareholder’s portfolio value only when pivotal; otherwise, it is better to vote against one’s information, distort the market, and then trade at the distorted price. In equilibrium, voting informativeness balances these forces and is demonstrably low. As the number of shareholders grows, the probability of making the correct decision is lower than the informational quality of just one shareholder’s private signal. Moving away from models of information, Levit et al. (2019) study the link between trading and voting when shareholders have heterogeneous preferences but there is no asymmetric information. The model develops an intuition for how shareholder support endogenously forms through trading before voting. Levit et al. (2021) study voting premium and develop a model in which a minority blockholder and dispersed shareholders vote on a proposal after trading shares. They show that voting premium can arise from the blockholder’s desire to influence who excises control and is unrelated to measures of the voting power. There is also a growing empirical literature on the relationship between voting and trading. For example, Li et al. (2022) find that trading volume is high around shareholder meetings. Fos and Holderness (2021) find that activist investors buy marginal votes.
References
Acharya, A. and Meirowitz, A. (2017) “Sincere voting in large elections.” Games and Economic Behavior, 101: 121–131
Austen-Smith, D. and Banks, J.S. (1996) “Information aggregation, rationality, and the Condorcet jury theorem.” American Political Science Review, 90: 34-45
Bar-Isaac, H. and Shapiro, J. (2020) “Blockholder voting.” Journal of Financial Economics, 136: 695-717
Bhattacharya, S. (2013) “Preference monotonicity and information aggregation in elections.” Econometrica, 81: 1229-1247
Bond, P. and Eraslan, H. (2010) “Strategic voting over strategic proposals.” Review of Economic Studies, 77: 459-490
Bouton, L., Llorente-Saguer, A., Mace, A. and Xefteris, D. (2021) “Voting in shareholders meetings.” National Bureau of Economic Research Technical Report
Brav, A. and Mathews, R.D. (2011) “Empty voting and the efficiency of corporate governance.” Journal of Financial Economics, 99: 289-307
Duggan, J. and Martinelli, C. (2001) “A Bayesian model of voting in juries.” Games and Economic Behavior, 37: 259-294
Ekmekci, M., Lauermann, S. et al. (2019) “Informal elections with dispersed information.” Technical Report, University of Bonn and University of Mannheim, Germany
Feddersen, T. and Pesendorfer, W. (1997) “Voting behavior and information aggregation in elections with private information.” Econometrica: Journal of the Econometric Society, 1029–1058
Feddersen, T. and Pesendorfer, W. (1998) “Convicting the innocent: the inferiority of unanimous jury verdicts under strategic voting.” American Political Science Review, 92: 23–35
Fos, V. and Holderness, C.G. (2021) “The distribution of voting rights to shareholders.” European Corporate Governance Institute – Finance Working Paper
Levit, D. and Malenko, N. (2011) “Nonbinding voting for shareholder proposals.” Journal of Finance, 66: 1579-1614
Levit, D., Malenko, N. and Maug, E.G. (2019) “Trading and shareholder democracy.” European Corporate Governance Institute – Finance Working Paper
Levit, D., Malenko, N. and Maug, E.G. (2021) “The voting premium.” European Corporate Governance Institute – Finance Working Paper
Li, S.Z., Maug, E.G. and Schwartz-Ziv, M. (2022) “When shareholders disagree: trading after shareholder meetings.” Review of Financial Studies, 35: 1813-1867
Malenko, A. and Malenko, N. (2019) “Proxy advisory firms: the economics of selling information to voters.” Journal of Finance, 74: 2441-2490
Mandler, M. (2012) “The fragility of information aggregation in large elections.” Games and Economic Behavior, 74: 257-268
Marquis de Condorcet, M.J.A. (1785) Essai sur l’application de l’analyse a la probabilite des decisions: rendues a la pluralite de voix. De l’Imprimerie royale.
Maug, E. (1998) “Large shareholders as monitors: is there a trade-off between liquidity and control?” Journal of Finance, 53: 65-98
Maug, E. and Rydqvist, K. (2009) “Do shareholders vote strategically? Voting behavior, proposal screening, and majority rules.” Review of Finance, 13: 47-79
Meirowitz, A. (2002) “Informative voting and Condorcet jury theorems with a continuum of types.” Social Choice and Welfare, 19: 219–236
Meirowitz, A. and Pi, S. (2022) “Voting and trading: the shareholders dilemma.” Journal of Financial Economics