The Wall Street Stampede: Exit as Governance with Interacting Blockholders
76 Pages Posted: 23 Oct 2019 Last revised: 14 Feb 2022
Date Written: February 9, 2022
The growth of the asset management industry has made it commonplace for firms to have multiple institutional blockholders. In such firms, the strength of governance via exit depends on how blockholders react to each other's exit. We present a model to show that open-ended institutional investors such as mutual funds react strongly to an informed blockholder's exit, leading to correlated exits that enhance corporate governance. Our analysis points to a new role for mutual funds in corporate governance. We examine the trades of mutual funds around exits by activist hedge funds to present empirical evidence consistent with our model.
Keywords: institutional investors, competition for flow, governance via exit, correlated trading
JEL Classification: G23, G34
Suggested Citation: Suggested Citation