Why managers should listen to shareholders

ARTHUR BALFOUR was a British prime minister who did not think much of his party members. “I’d rather take advice from my valet than from the Conservative party conference,” he said. Corporate executives, particularly in America, seem to take a similar attitude towards their shareholders, believing that, like children, they should be seen but definitely not heard.

Maybe managers should get their fingers out of their ears and start listening to their investors. That is the conclusion of a recent paper* by Clifford Holderness of the Carroll School of Management at Boston College.

In America and a few other countries, boards can issue more shares without shareholder approval. In some countries, shareholders must approve issuance above a certain threshold. And in yet others, investors must agree before any new stock can be created. So what happens to a company’s share price when new shares are issued? Mr Holderness performed a meta-analysis of more than 100 studies of stock reactions around the world. He found that, when shareholders approved issuance in advance, the price tended to rise by an average of 2%. But when managers issued stock without shareholder approval, the share price declined by an average of 2...



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