Weak Governance by Informed Active Shareholders

Do informed shareholders who can influence corporate decisions improve governance? We demonstrate this may not be generally true in a model of takeovers. The model suggests that a shareholder’s ability to collect information and trade ex post may cause him, ex ante, to support value-destroying takeovers or oppose value-enhancing takeovers. Surprisingly, we find conditions under which giving the active shareholder greater influence power weakens governance and reduces firm value, even if such influence power can be used to reject bad takeovers ex post. Our model sheds light on why relying on informed, active shareholders to improve governance has its limits