The “Wall Street Walk” and Shareholder Activism: Exit as a Form of Voice

We examine whether a large shareholder can alleviate conflicts of interest between managers and shareholders through the credible threat of exit on the basis of private information. In our model the threat of exit often reduces agency costs, but additional private information need not enhance the effectiveness of the mechanism. Moreover, the threat of exit can produce quite different effects depending on whether the agency problem involves desirable or undesirable actions from shareholders perspective. Our results are consistent with empirical findings on the interaction between managers and minority large shareholders and have further empirical implications.

Anat R. Admati and Paul Pfleiderer

Stanford University Graduate School of Business

July 2007

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