Regulatory Outreach for Student Education

Engaging Students in the Debate Over Financial Services Reform

Today’s debate over regulatory reform is a watershed activity in the careers of financial industry professionals. Years ago, similar debates over mandated pre-funding of pension liabilities (ERISA) and the reunification of investment banking with commercial banking (Glass Steagall's repeal) changed the direction of financial market evolution. Opinions may differ on the merits of those changes, but no one disputes their significance.

Without question, college students and young professionals should be well-versed in the issues involved in today's debate. The Regulatory Outreach for Student Education (ROSE) program is the Center's way to give top students, tomorrow's business and finance leaders, opportunities to experience the financial regulatory process up-close.  The ROSE program is designed to put students in touch with the regulators, policy-makers, and industry leaders who are currently shaping the financial regulatory landscape.  We then challenge them to research and articulate their own positions on the most intriguing and interesting issues.  

ROSE Program Blog

Wednesday, July 23, 2014

Does Mandatory Shareholder Voting Prevent Bad Acquisitions?

Paper studies how much power shareholders should delegate to the board of directors.


Author: David Schwartz J.D. CPA

In the United Kingdom, corporate acquisition deals larger than 25% in relative size are subject to a mandatory shareholder vote, while in most of continental Europe there is no vote, and in Delaware voting is largely discretionary. In a new paper by Marco Becht, Professor of Corporate Governance at the Université libre de Bruxelles; Andrea Polo of the Department of Economics and Business at the Universitat Pompeu Fabra and Barcelona GSE; and Stefano Rossi of the Department of Finance at Purdue University studies the effect shareholder engagement has on preserving shareholder value in these kinds of large-scale acquisition transactions. Their study concludes that mandatory voting makes boards more likely to refrain from overpaying or from proposing deals that are not in the interest of shareholders.  

According to the paper's abstract: 

In the United Kingdom, corporate acquisition deals larger than 25% in relative size are subject to a mandatory shareholder vote, while in most of continental Europe there is no vote, and in Delaware voting is largely discretionary. In a new paper by Marco Becht, Andrea Polo, and Stefano Rossi studies the effect shareholder engagement has on preserving shareholder value in these kinds of large-scale acquisition transactions. Their study concludes that mandatory voting makes boards more likely to refrain from overpaying or from proposing deals that are not in the interest of shareholders.


How does mandatory voting bring about these positive results? The paper infers that mandatory voting makes boards more likely to refrain from overpaying or from proposing deals that are not in the interest of shareholders. The authors found that shareholders never voted against this class of acquisition transactions ex-post and deals that were poorly received by the market at announcement were often dropped before they reached the voting stage. 

The results show that giving shareholders a direct decision right over large transactions can have a positive causal effect by discouraging bad corporate acquisitions.

Print