Valuation of shareholder dissenting votes when management is entrenched

Abstract

We investigate the valuation implications of shareholder dissenting votes as a disciplining mechanism in the context of management entrenchment. Our study is motivated by the controversy surrounding shareholder voting, which led to the 2010 U.S. Securities and Exchange Commission (SEC) rules that accelerated and enhanced the disclosure of shareholder voting outcomes. We find adverse and economically meaningful market reactions to the initial disclosure of greater shareholder dissenting votes when management is more entrenched. However, we observe a subsequent positive market reaction to the announcement of CEO dismissal in firms with greater shareholder dissent and entrenched management. An array of supplementary and robustness analyses further support our results. Collectively, our findings suggest that investors have low expectations of board effectiveness when shareholder dissenting votes are greater and management is more entrenched, but the unexpected dismissal of an entrenched CEO represents a surprise that is welcomed by the market. Overall, our evidence clarifies the ongoing debate in the literature about the value of shareholder voting by demonstrating that management entrenchment is a channel for explaining the disciplining role of shareholder voting. Our findings support the SEC’s contention that more timely and prominent disclosure of shareholder voting results benefits capital market participants. Our study also informs consideration of the use of technology (e.g., blockchain) to expand shareholder participation in corporate voting.