joint with Amil Dasgupta

Effective monitoring by equity blockholders is important for good corporate governance. A prominent theoretical literature argues that the threat of block sale (“exit”) can be an affective governance mechanism. Many blockholders are money managers. We show that when money managers compete for investor capital, the threat of exit loses credibility, weakening its governance role. Money managers with more explicitly profit-linked compensation will govern more successfully using exit. When exit complements shareholder voice, these results apply to a wider range of governance activities. Our results link widely prevalent incentives in the money management industry to the nature of corporate governance.

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