A Theory of Vote Trading and Information Aggregation†

The ability to buy “empty votes” by using derivative contracts to separate shares’ voting and cash flow rights is a cause of policy concern. We construct a formal model of a market for empty votes where informed and uninformed (and potentially biased) shareholders endogenously choose to demand or supply. There always exists an equilibrium where only informed shareholders demand votes, since uninformed shareholders’ willingness to pay for votes is endogenously reduced by two effects: the “swing bidders’ curse” and the “crowding out effect”. Votes are transferred from uninformed to informed actors, thus trading improves welfare by better aggregating information. We provide conditions under which trading can achieve full information aggregation. In the presence of frictions such as forced voting or contrarians (short sellers) the endogeneity of vote supply can limit the damage they can cause: if they are too prevalent then uninformed and unbiased shareholders simply refrain from supplying. JEL Classification Codes: G34, C72.