Doron Levit’s Research on Shareholder Democracy Wins Brattle Group Prize

Doron Levit, University of Washington Foster School of Business Professor of Finance and Business Economics, was recently awarded the $25,000 first-place prize in the Brattle Group Prizes in Corporate Finance at the American Finance Association’s annual meeting. Levit and his co-authors, Nadya Malenko and Ernst Maug, were honored for their article “Trading and Shareholder Democracy,” published in the Journal of Finance in February 2024.

“I’m deeply honored by this recognition, which reflects years of collaborative research with my colleagues Nadya Malenko and Ernst Maug,” said Levit. “This award not only acknowledges our work but also highlights the critical importance of understanding corporate governance mechanisms. Our research illuminates how the practice of shareholder voting, which is often referred to as shareholder democracy, shapes corporate policies and ultimately affects societal welfare.”

The Brattle Group Prizes recognize outstanding academic papers in corporate finance. The Associate Editors of the Journal of Finance select the winners from papers published in the academic journal over the course of the year.

The downsides of democracy

Levit and his colleagues’ findings extend beyond academia, influencing all shareholders of publicly traded companies who seek a voice in corporate decision-making.

Unlike in political elections, financial markets allow investors to trade shares before casting their votes. As business complexities and societal polarization increase, investors may hold differing views on corporate policies, influencing their investment choices and expectations for corporate governance. Levit’s research finds that this link between trading and voting leads to self-fulfilling voting outcomes and, ultimately, inefficient corporate decision-making.

“The paper strikes a cautious note on shareholder democracy,” he said. “In a world with conflicting views and interests, voting may exacerbate, rather than alleviate, shareholders’ collective action problem.”

A gap between shareholder price and wealth

In a surprising and significant discovery, Levit and his colleagues found that stock prices are not a reliable measure of shareholder welfare. “We discovered that changes in corporate governance can actually move share prices and shareholder welfare in opposite directions. This counterintuitive result challenges a fundamental assumption in empirical corporate governance research. It suggests that stock price reactions to voting outcomes may be unreliable indicators of actual shareholder welfare—in some cases, they might even indicate the opposite of the true welfare effect.”

Beyond teaching mergers and acquisitions courses to Foster MBA students, Levit is a prolific researcher. His work covers topics including corporate governance and managerial incentives, and he serves as an Associate Editor at The Review of Financial Studies.