Kobi Kastiel is a Research Director of The Project on Controlling Shareholders at the Harvard Law School Program on Corporate Governance, and Yaron Nili is Assistant Professor at University of Wisconsin Law School. This post is based on their recent article, forthcoming in the Delaware Journal of Corporate Law. Related research from the Program on Corporate Governance includes Frozen Charters by Scott Hirst (discussed on the Forum here).
Corporate law scholars have taken investors’ rational apathy for granted for decades, considering it a necessary evil once ownership is no longer closely held. The traditional explanation is well known: diversified retail investors, who individually hold small fractions of a firm’s equity capital, often lack the financial incentives to monitor management, as they know that their vote probably will not affect the outcome. Since the process of informing and expressing one’s preferences is costly, these investors often choose to refrain from any involvement in the governance of the corporation. For such a shareholder, it is simply economically rational to stay uninformed and not to vote at all.
