The Wall Street Stampede: Exit as Governance with Interacting Blockholders

Publication Date
Financial Markets Group Discussion Papers DP 841
Publication Date
Paul Woolley Centre Discussion Papers No 80

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 large-sample evidence consistent with our model.