In our paper Empty Voting and the Efficiency of Corporate Governance, which is forthcoming in the Journal of Financial Economics, we model corporate voting outcomes when an informed trader, such as a hedge fund, can establish separate positions in a firm’s shares and votes. Recent research has shown that some hedge funds may use “empty voting”—a practice whereby they accumulate voting power in excess of their economic share ownership—to manipulate shareholder vote outcomes and generate trading gains. This practice is possible even when one share, one vote is the explicit rule. It can be accomplished, for example, by borrowing shares of stock on the record date, or by hedging economic exposure in the derivatives markets. This can lead to perverse voting incentives, and may decrease the efficiency of the corporate governance process. However, there may be an offsetting benefit if empty voting enables parties with superior information to have a greater impact on voting outcomes. Our theoretical model explores this trade-off.

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