The Market Value of Corporate Votes

The following post comes to us from Avner Kalay, Professor of Finance at the University of Utah; Oguzhan Karakas of the Finance Department at Boston College; and Shagun Pant of the Finance Department at Texas A&M University.

In our paper, The Market Value of Corporate Votes: Theory and Evidence from Option Prices, which was recently made publicly available on SSRN, we propose a new method to measure the market value of the right to vote. We quantify the market value of the right to vote as the difference in the prices of the stock and the corresponding synthetic stock. The synthetic (non-voting) stock is constructed using option prices, particularly facilitating the put-call parity relationship. The main insight is that the owners of common stocks have both cash flow rights and voting rights, whereas holders of synthetic stocks have the cash flow rights but not the voting rights. Hence, the difference in the price of the stock and the synthetic stock quantifies the market value of the vote during the expected life of the synthetic stock.

Estimating the market value of the voting rights embedded in stocks is important to our understanding of corporate control. Evidence on the market value of the vote thus far has been focused on two methods of estimation. First, one can compare the prices of multiple classes of shares having identical cash flow rights and differential voting rights. Second, one can consider sales of controlling blocks in publicly traded companies and compare the price paid per share for the block with the prevailing stock price right after the transaction. Both approaches have advantages but also their problems. For instance, the former requires that at least two classes of shares be publicly traded. However, only a small percent of US publicly traded companies are dual-class firms. Moreover, the two classes usually differ in their liquidity. More importantly, these samples are potentially subject to selection biases. With the latter, it is not possible to measure the value of control when the controlling block is not transferred. The potential selection bias and the small sample size are other limitations. With our technique, one can estimate the market value of voting rights attached to a stock at any time, as long as the stock has call and put option pairs traded. Our method allows for the quantification of the market value of the vote for a large number of stocks.

Empirically, we find this measure of the voting rights to increase with the expiration of the options used to construct the synthetic stocks. We estimate the mean annualized value of a voting right to be 1.58% of the underlying stock price in the US over 1996-2007. Consistent with theory, the value of vote increases around shareholder meetings which are likely to be more contentious, such as special meetings, meetings with a high-ranking agenda (e.g., antitakeover, mergers & reorganizations), and meetings with ex-post closed votes. We also find that the value of the vote increases around M&A events and periods of hedge fund activism. Finally, we show that the value of the vote is not bounded by exogenous arbitrage activity – to the contrary – the value of the vote is an important ingredient in the cost of the put-call arbitrage activity.

Our paper contributes to the literature on Corporate Governance by introducing a new method for measuring the value of voting rights. Indeed, the method can be applied to any study focusing on corporate governance. The method might also be useful for understanding control related issues in the Financial Regulation framework. Finally, the method has implications for the option pricing literature. For instance, it provides a potential explanation for some of the observed put-call parity violations and irrational early exercises of call options.

The full paper is available for download here.

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