Institutional Stock Sales and Takeovers: The Disciplinary Role of Voting With Your Feet

Can institutional stock sales influence firm governance? Theory suggests that informed selling is likely to depress prices and disperse shareholding. Combined, both effects can influence firm governance by facilitating takeovers. I formalize this hypothesis and test its predictions on firms that undertake large acquisitions. Using acquisitions to identify firms with potential agency problems, I relate trading by the largest institutional block holder in the post acquisition period to subsequent firm performance and changes in firm governance. The main findings are: (i) Trading by the largest block holder predicts post acquisition stock performance; (ii) controlling for performance, block holder selling increases takeover probability by over 35%; (iii) small firms with more liquid stock are likely to become targets and (iv) there is evidence that the block holder is aware of the takeover possibility before the market. The findings are robust to alternate specifications, alternate samples, and provide a rationale for the observed preference of management and board of directors to retain institutional shareholders. Institutional Stock Sales and Takeovers: The Disciplinary Role of Voting With Your Feet