Mutual funds hold about a quarter to a third of outstanding shares of U.S. companies in the past decade and therefore have the potential to play a pivotal role in corporate governance. We simultaneously consider two governance approaches of mutual funds in the proxy voting setting: First, they can follow the “Wall Street rule” when dissatisfied with firm management, that is, sell their shares and “exit” the firm. This approach is modeled by Admati and Pfleiderer (2009), Edmans (2009), and Edmans and Manso (2011). Second, they can attempt to directly intervene (“voice”) by voting against firm management, as suggested by theories of Shleifer and Vishny (1986), Maug (1998), and Kahn and Winton (1998).
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