Abstract
This paper studies communications between investors and firms as a form of corporate governance. Activist investors cannot force their ideas on companies; they must persuade the board or other shareholders that implementing these ideas is beneficial to the firm. I show that the threat of voice (i.e., launching a public campaign) facilitates communication, whereas the option to exit facilitates communication if and only if the proposal is risky relative to the status quo or voice is ineffective as a governance mechanism. The analysis identifies factors that contribute to successful dialogues between investors and firms.
ReceivedMay 31, 2017; editorial decision September 4, 2018 by Editor Francesca Cornelli.
