Document Type

Article

Publication Date

2024

Abstract

Can retail investors revolutionize corporate governance and make public companies more responsive to social concerns? Beginning in 2021, there was a dramatic influx of retail investors into the shareholder base of “meme” stock companies such as GameStop, AMC, and Bed Bath & Beyond. Observing the unprecedented, coordinated trading among retail investors, scholars and practitioners predicted that the influx of retail investors would reduce the power of large institutional investors and democratize corporate governance. These predictions were driven by three factors: generational, with assumptions that millennial and Gen Z investors would challenge corporate management; societal, reflecting growing discontent with slow progress on issues such as sustainability and boardroom diversity; and technological, with the advent of easily accessible and user-friendly mobile apps allowing investors to directly intervene in corporate governance. While plausible, these predictions have so far not been tested. This Article empirically analyzes the impact of retail investors on corporate governance, particularly at meme stock companies. We provide new quantitative evidence regarding the origins of meme investing and conclude that—despite their coordinated trading behavior in the market—meme investors have not democratized corporate governance or advanced social issues. The Article presents three principal findings. First, we show how the “meme stock” frenzy was affected by the abolition of trading commissions by major brokerages in 2019. Meme stock companies experienced positive abnormal stock returns when commission-free trading was widely introduced and saw elevated trading volumes afterward. Second, we find that despite the promise of a more active retail shareholder base, meme stock companies experienced a significant decrease in shareholder voting. Shareholder proposals have also been very limited, with most meme stock companies seeing no proposals after the rapid rise in retail ownership. Third, we do not find any improvement in meme stock companies’ corporate governance, financial performance, and social responsibility, as represented by director independence, board gender diversity, ESG scores, and capital and R&D expenditures. Collectively, our findings suggest that the influx of retail shareholders has not translated into more “democratic” governance regimes or encouraged shareholder participation in corporate governance at companies most affected by the meme investor storm.

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© 2024 Southern California Law Review. Reproduced with permission.

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