Setting up in January 2021, the U.S. stock market place was strike by a “meme stock” storm. Fueled by the rise of zero-fee investing (popularized by Robinhood) and on-line coordination through social media sites—such as Reddit—retail traders engaged in an active “buy” marketing campaign to push up the inventory rates of firms like GameStop and AMC to stratospheric degrees. Using gain of the elevated inventory rates, these companies unsurprisingly engaged in substantial amounts of cash increasing through inventory product sales, alleviating their beforehand dire liquidity problem. The historic upsurge in retail investing has been fulfilled with both of those cynicism and celebration. Some students, involved with the implication for the market’s efficiency, referred to as for regulation of zero-commission trading and, additional broadly, retail investing. Other individuals, on the other hand, considered the meme stock frenzy as signaling a new era of empowered retailed traders. These with a far more optimistic outlook on the meme stock frenzy have argued that coordinated retail investor motion can additional lead to coordinated shareholder motion, empowering retail shareholders to provide about substantial improvements in corporate governance and to even make firms extra prosocial. Did the inflow of retail traders basically have an affect on the governance composition at the meme inventory companies? In a latest paper, we deliver an empirical evaluation of the components that developed the meme phenomenon and its repercussions for corporate governance.
We commence by examining the backgrounds of meme trading. The present scholarship has completely related meme shares with the surge in social media fascination (such as Reddit boards) in 2021. Whilst pandemic-period Reddit boards absolutely performed a critical role in popularizing these stocks, we trace the origins of meme buying and selling additional back, to the pre-pandemic era. Employing an celebration research methodology, we obtain that meme shares exhibited irregular returns in Oct 2019, when significant on the net brokerages, such as Charles Schwab and TD Ameritrade, abolished commissions for buying and selling. This indicates that meme providers ended up uniquely positioned to reward from the afterwards surge in retail investor interest.
Right after documenting the worth of zero-commission buying and selling on meme shares, we move forward to analyze the outcomes of meme surge for corporate governance at the corporations. Particularly, did the retail traders truly transform the substance of the supervisor-shareholder romance, or corporations’ guidelines toward culture? We begin with company law’s paradigmatic framework for shareholder influence in extensively held community firms: voting and shareholder proposals. Foremost, we obtain that non-voting—i.e., the share of votes that had been not forged for or towards a proposal (or marked as abstentions)—in truth greater through and after the meme surge interval for the firms in the sample. While we do not have a immediate evaluate on what portion of the non-votes came from retail shareholders, considering the fact that non-voting is closely linked with retail traders (as documented in the existing literature), the getting implies that meme traders have been apathetic in their job as stockholders and did not physical exercise their franchise.
Turning to shareholder proposals, we find no proof that shareholders at meme inventory companies are additional probably to take part in governance actions by submitting shareholder proposals, both right before or just after the meme surge. Between 2015 and 2022, only one particular meme stock company—Bed Tub & Beyond—had any shareholder proposal bundled in the company’s definitive proxy statements at all. There was also no file of any shareholder proposal getting excluded via the SEC’s no-action letter course of action, with the exception of GameStop, which effectively excluded three shareholder proposals submitted in 2022. The proof supports the hypothesis that the retail buyers brought in by the meme phenomenon have been therefore either uninterested in voting or generating proposals, or not able to do so proficiently.
We then analyze irrespective of whether retail investors were being ready to affect meme organization policy with respect to environmental, social, and governance (ESG) goals—perhaps as a result of oblique channels. Making use of a variation-in-difference strategy to information from the typical MSCI ESG Indexes, we obtain that meme stock companies astonishingly deteriorated in phrases of prosocial general performance just after the meme surge of 2021. We also search at no matter if meme companies carried out greater in terms of board gender diversity—another salient concern in the company governance sphere. We discover no evidence that meme organizations executed much better (or even worse) on this metric. Meme retail traders do not appear to have designed their companies’ governance and overall performance much more prosocial. In truth, if everything, the ESG end result indicates that these firms’ orientation toward social results in may well have worsened in new yrs.
Viewing these results collectively leads us to aid the hypothesis that to date there is tiny proof that company governance is remaining “democratized” at meme inventory organizations. The organized motion amongst retail investors looks to be minimal to the investing public’s buying and selling conduct and has not in any other case influenced retail shareholders’ engagement with firms in a obvious way. In addition, the latest regulatory changes—such as the lifted threshold for distributing shareholder proposals less than Rule 14a-8—may have made powerful retail shareholder participation a lot more difficult. For these motives, we think that meme traders might nicely remain passive as shareholders, even as they continue being energetic as investors. To a sure extent, they can be noticed as mirror photographs of large institutional investors, who are normally passive as buyers, even though remaining active as shareholders.
Provided that the paper’s concentration is on a tiny selection of providers that went via an unusual working experience of dealing with a unexpected surge of retail investors’ interest, a single needs to be careful about generalizing the success to other organizations or producing overarching conclusions. At the identical time, these firms were being selected specifically mainly because they were the major targets of meme investing. Consequently, to the extent we must have noticed a new paradigm of corporate governance associated with meme surges, these corporations would have been the most promising ones. Appropriately, we believe that the paper’s conclusions are informative in getting a much better being familiar with of retail shareholders’ engagement and prospective, democratizing advantages of letting extra retail investor participation. To get a far better comprehension of the worth of retail investor base on company governance, a potential investigate venture may consider a closer search at how technological adjustments, like the introduction of zero-fee trading, may possibly have had a broader influence on the funds markets and also the a lot more basic affect of retail buyers on corporate governance across a greater phase of the marketplace.
The full paper is accessible right here.