Decoupling Voting and Cash Flow Rights

The equity lending and option market both allow investors to decouple voting and cash flow rights of common shares. We provide a theory of this decoupling. While either market enables investors to acquire voting rights without cash flow exposure, empirical studies demonstrate a substantial difference in implied vote prices. Our model explains this surprising difference by uncovering the mechanism by which vote prices in the equity lending market are endogenously lower than those implied by the option market. We show that even though votes are cheaper in the equity lending market, activists endogenously choose to purchase votes in both markets.