Academic journal article Academy of Accounting and Financial Studies Journal

Heterogeneity between "Vote-with-Hand" and "Vote-with-Feet" Shareholders

Academic journal article Academy of Accounting and Financial Studies Journal

Heterogeneity between "Vote-with-Hand" and "Vote-with-Feet" Shareholders

Article excerpt

INTRODUCTION

In the corporate world, members of boards of directors are supposed to act in a way to maximize shareholders' benefits. But in reality many board members also take executive positions in the company. The dual roles of top executive and board member create conflicts between board of directors and shareholders who do not have direct control of the company, even though theoretically they are all shareholders. For example, Johnson et al. (2000) identify a phenomenon called "tunneling" where controlling shareholders transfer assets or profits out of firms for their own benefits.

Besides voting in annual meetings, which we will denote as "vote with hand" in this paper, shareholders can also "vote with feet", meaning to sell shares in the open markets when they are not satisfied with a company's performance or policy. Most previous studies on the value impact of corporate governance focus on examining the relationship between corporate governance structure and stock performance, which is mainly influenced by the actions of "vote-with-feet" shareholders. For example, Gompers et al. (2003) (GIM) posit that provisions that lower the effectiveness of takeover threats would result in lower stock returns. Cremers and Nair (2005) find that portfolios composed of companies with different governance structure experience different levels of abnormal returns. The relatively worse stock performance is considered a reduction to shareholders' value as a result of inadequate corporate governance. But not much attention has been paid to the monitoring costs borne by shareholders who want to change the corporate policies through voting in annual meetings. Soliciting shareholders' votes is a costly process. These costs are a direct reduction to shareholders' wealth as well. Some shareholders spend a considerable amount of financial resources and time on proxy voting process. For example, the mailing and publicity costs for dissenting shareholders to unseat a standing board can be as high as millions of dollars (McCracken and Scannell, 2009). We argue that costs related to investor campaigns and proxy solicitation processes should be counted in when examining factors affecting shareholders' value.

Shareholder proposal is an approach shareholders can pursue to influence corporate policies. But since this approach is usually used after failed negotiations with management groups and it has no binding power, there has been a debate in academic research on the effectiveness of shareholder proposals as a means to solve corporate agency problems. Even though there are studies demonstrating that proposals obtained majority support among shareholders are likely to be implemented because management groups do not want to tarnish their reputation (Ertimur et al., 2010; Thomas and Cotter, 2007), practitioners generally consider the role of shareholder proposals to be relatively weak, because shareholders can always "vote with feet" first when they are not satisfied with the company's performance. Even institutional investors, which are usually considered as long-term investors, are found actively engaged in short-term and momentum trading (Parrino et al., 2003; Renneboog and Szilagyi, 2011). Empirical studies also show that shareholder proposals tend to target at companies already showing poor performance in stock markets (Karpoff et al., 1996; Ng et al., 2009). So it is not clear whether shareholder dissatisfaction reflected in shareholders' voting in annual meetings will bring any different functions to corporate governance other than those of "vote-with-feet" investors.

Since "vote-with-hand" shareholders experience additional costs in terms of money and time to express their opinions in annual meetings, a study on the preference of this group of shareholders can reveal more information on what factors may cause more monitoring costs for "vote-with-hand" shareholders. We also want to look at whether the dissatisfaction among "vote-with-hand" shareholders is mainly triggered by financial performance or corporate governance of a company. …

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