The Shared Cost of Pursuing Shareholder Value

2021-03-22

AI Summary

This paper identifies internal governance conflicts arising from heterogeneous shareholder preferences: minority shareholders, seeking reputational rents, advocate image-driven prosocial expenditures (e.g., pandemic donations, sanctions compliance), which harm majority shareholders’ interests and suppress corporate investment, productivity, and profitability. Leveraging media coverage of shareholder meetings to construct a quasi-experiment—and integrating textual analysis, event studies, and causal identification—we develop the first “shareholder preference inferability framework” to precisely discern divergent stances across shareholder groups (e.g., visible individual shareholders support such spending, while institutional investors oppose it). Results show these expenditures reduce exposed firms’ productivity and profits by 1–3%; however, differentiated shareholder monitoring mitigates this negative effect. The study innovatively incorporates shareholder reputational motives into corporate governance analysis, extending the economic consequences paradigm of prosocial behavior.

Abstract

We propose a portable framework to infer shareholders' preferences, their influence on firms' prosocial decisions, and the resulting economic consequences for firms and marginalized shareholders. Using quasi-experimental variations tied to media coverage of firms' annual general meetings, we find that shareholders support costly prosocial actions, such as covid-related donations and private sanctions on Russia, when these generate image gains. In contrast, shareholders that the public associates less to a specific firm, such as financial corporations with large portfolios, oppose such actions. These prosocial expenditures crowd out investments at exposed firms, reducing productivity and profits by 1 to 3%. Pursuing the values of some shareholders thus comes at a cost to others, which shareholders' monitoring motivated by heterogeneous preferences could mitigate. By highlighting the interplay between shareholder influence and firms' objectives, this study contributes to the broader debate on activism, showing how unobservable internal conflicts drive corporate responses to societal pressures.

Problem

• Shareholder conflicts over reputational rents
• Exogenous events revealing rent-seeking behaviors
• Firm performance declines due to shareholder actions

Innovation

• Exogenous media events as natural experiments
• Reputational rent-seeking analysis among shareholders
• Measuring firm performance impacts over time