Meme Corporate Governance

Albert H. Choi is Paul G. Kauper Professor of Law at the University of Michigan, Dhruv Aggarwal is a J.D. Candidate at Yale Law School and Ph.D. Candidate at Yale School of Management, and Alex Lee is Professor of Law at Northwestern Pritzker School of Law. This post is based on their recent paper.

Starting in January 2021, the U.S. stock market was hit by a “meme stock” storm. Fueled by the rise of zero-commission trading (popularized by Robinhood) and online coordination through social media sites—such as Reddit—retail investors engaged in an active “buy” campaign to push up the stock prices of companies like GameStop and AMC to stratospheric levels. Taking advantage of the elevated stock prices, these firms unsurprisingly engaged in large amounts of capital raising through stock sales, alleviating their previously dire liquidity condition. The historic upsurge in retail investing has been met with both cynicism and celebration. Some scholars, concerned with the implication for the market’s efficiency, called for regulation of zero-commission trading and, more broadly, retail investing. Others, on the other hand, viewed the meme stock frenzy as signaling a new era of empowered retailed investors. Those with a more optimistic outlook on the meme stock frenzy have argued that coordinated retail investor movement can further lead to coordinated shareholder movement, empowering retail shareholders to bring about significant changes in corporate governance and to even make companies more prosocial. Did the influx of retail investors actually affect the governance structure at the meme stock companies? In a recent paper, we provide an empirical assessment of the factors that created the meme phenomenon and its consequences for corporate governance.

We start by analyzing the backgrounds of meme trading. The existing scholarship has exclusively associated meme stocks with the surge in social media interest (such as Reddit boards) in 2021. While pandemic-era Reddit boards surely played a key role in popularizing these stocks, we trace the origins of meme trading further back, to the pre-pandemic era. Using an event study methodology, we find that meme stocks exhibited abnormal returns in October 2019, when major online brokerages, such as Charles Schwab and TD Ameritrade, abolished commissions for trading. This suggests that meme companies were uniquely positioned to benefit from the later surge in retail investor interest.

After documenting the importance of zero-commission trading on meme stocks, we proceed to examine the consequences of meme surge for corporate governance at the companies. Specifically, did the retail investors actually change the substance of the manager-shareholder relationship, or corporations’ policies toward society? We begin with corporate law’s paradigmatic framework for shareholder influence in widely held public corporations: voting and shareholder proposals. Foremost, we find that non-voting—i.e., the share of votes that were not cast for or against a proposal (or marked as abstentions)—in fact increased during and after the meme surge period for the companies in the sample. Although we do not have a direct measure on what fraction of the non-votes came from retail shareholders, since non-voting is closely associated with retail investors (as documented in the existing literature), the finding suggests that meme traders were apathetic in their role as stockholders and did not exercise their franchise.

Turning to shareholder proposals, we find no evidence that shareholders at meme stock companies are more likely to participate in governance activities by submitting shareholder proposals, either before or after the meme surge. Between 2015 and 2022, only one meme stock company—Bed Bath & Beyond—had any shareholder proposal included in the company’s definitive proxy statements at all. There was also no record of any shareholder proposal being excluded via the SEC’s no-action letter process, with the exception of GameStop, which successfully excluded three shareholder proposals submitted in 2022. The evidence supports the hypothesis that the retail investors brought in by the meme phenomenon were hence either uninterested in voting or making proposals, or unable to do so effectively.

We then examine whether retail investors were able to affect meme company policy with respect to environmental, social, and governance (ESG) goals—perhaps through indirect channels. Applying a difference-in-difference approach to data from the standard MSCI ESG Indexes, we find that meme stock companies surprisingly deteriorated in terms of prosocial performance after the meme surge of 2021. We also look at whether meme companies performed better in terms of board gender diversity—another salient issue in the corporate governance sphere. We find no evidence that meme companies performed better (or worse) on this metric. Meme retail investors do not seem to have made their companies’ governance and performance more prosocial. In fact, if anything, the ESG result suggests that these firms’ orientation toward social causes may have worsened in recent years.

Viewing these results collectively leads us to support the hypothesis that to date there is little evidence that corporate governance is being “democratized” at meme stock companies. The organized movement among retail investors seems to be limited to the investing public’s trading behavior and has not otherwise affected retail shareholders’ engagement with corporations in a noticeable way. In addition, recent regulatory changes—such as the raised threshold for submitting shareholder proposals under Rule 14a-8—may have made effective retail shareholder participation more difficult. For these reasons, we believe that meme traders may well remain passive as shareholders, even as they remain active as investors. To a certain extent, they can be seen as mirror images of large institutional investors, who are often passive as investors, while remaining active as shareholders.

Given that the paper’s focus is on a small number of companies that went through an unusual experience of facing a sudden surge of retail investors’ interest, one needs to be cautious about generalizing the results to other companies or making overarching conclusions. At the same time, these companies were chosen precisely because they were the primary targets of meme trading. Thus, to the extent we should have observed a new paradigm of corporate governance associated with meme surges, these companies would have been the most promising ones. Accordingly, we believe that the paper’s findings are informative in getting a better understanding of retail shareholders’ engagement and potential, democratizing benefits of allowing more retail investor participation. To get a better understanding of the importance of retail investor base on corporate governance, a future research project may take a closer look at how technological changes, including the introduction of zero-commission trading, may have had a broader effect on the capital markets and also the more general impact of retail investors on corporate governance across a larger segment of the market.

The full paper is available here.

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