RFS Advance Access originally published online on May 18, 2009
Review of Financial Studies 2009 22(7):2645-2685; doi:10.1093/rfs/hhp037
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The "Wall Street Walk" and Shareholder Activism: Exit as a Form of Voice
Graduate School of Business, Stanford University
Graduate School of Business, Stanford University
Send correspondence to Anat Admati, Graduate School of Business, Stanford University, Stanford, CA 94305-5015; telephone: 650-723-4987. E-mail: admati{at}stanford.edu.
JEL Classification: D53, D82, G10, G30, G34
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Abstract |
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We examine whether a large shareholder can alleviate conflicts of interest between managers and shareholders through the credible threat of exit on the basis of private information. In our model, the threat of exit often reduces agency costs, but additional private information need not enhance the effectiveness of the mechanism. Moreover, the threat of exit can produce quite different effects depending on whether the agency problem involves desirable or undesirable actions from shareholders' perspective. Our results are consistent with empirical findings on the interaction between managers and minority large shareholders and have further empirical implications.
An earlier version of this paper has been previously circulated under the title "The `Wall Street Walk' as a form of Shareholder Activism." We would like to thank Sugato Bhattacharyya, Jernej Copic, Bob Hall, Ken Judd, Gustavo Manso, Christine Parlour, Maureen O'Hara, Ben Polak, Chester Spatt, Matt Spiegel, Masako Ueda; seminar participants at Berkeley, MIT, Northwestern, Stanford, the University of Wisconsin at Madison, UBC, and Yale; and especially Andy Skrzypacz and Jeff Zweibel for helpful comments.
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