Did the Meme Inventory Revolution Really Change Something?

Many monetary commentators thought that the surge of retail buyers taking part within the inventory market, probably the most notable of whom boosted “meme shares” like GameStop, would democratize company governance and enhance prosocial agency conduct, together with the promotion of environmental, social, and governance (ESG) objectives. In new analysis, Dhruv Aggarwal, Albert H. Choi, and Yoon-Ho Alex Lee discover proof that the precise reverse befell.

Lately, United States inventory markets have witnessed  a surge in participation from retail buyers. In accordance with Bloomberg Intelligence, within the first six months of 2020, retail buyers have been liable for almost 20% of all inventory trades, almost double their share in 2010. Beginning in 2021, particularly, on-line communities, consisting predominantly of millennial and Gen Z buyers, organized on the social media platform Reddit and engaged in coordinated campaigns to buy shares of corporations akin to AMC and GameStop. The recognition of those shares appeared divorced from their monetary fundamentals, they usually grew to become often known as “meme shares.” The title of a latest main Hollywood movie on meme investing, Dumb Cash, signifies what number of pundits considered the phenomenon and its individuals.

The preliminary logic driving the campaigns was the idea that hedge funds have been benefiting from these corporations’ dire monetary conditions and ruthlessly shorting, or betting in opposition to, these meme shares, thus suppressing their costs. These Reddit communities sought to stress the hedge funds to unwind their quick positions. However because the share costs of those corporations reached stratospheric ranges, commentators speculated that meme buyers (and retail buyers, extra typically) would possibly disrupt the affect of institutional buyers in one other approach by asserting their voices within the boardroom. Particularly, these commentators thought the flood of recent retail buyers would possibly  nudge corporations to undertake the extra prosocial environmental, social, and governance (ESG) insurance policies favored by youthful generations. In a forthcoming publication, titled “Meme Company Governance,” we empirically assess whether or not meme buyers had a tangible impact on company governance at corporations like AMC and GameStop. We discover that they didn’t.

First, our evaluation questions the traditional knowledge that the meme inventory phenomenon originated on Reddit boards in 2021 and as an alternative traces it additional again in time to the abolition of buying and selling commissions by main on-line brokerages in October 2019. The established brokerages stopped charging commissions presently to stem their lack of market share to Robinhood, the app that  pioneered commission-free buying and selling. We classify corporations as meme inventory corporations primarily based on the consensus fashioned among the many media and educational commentary. We discover eight corporations that have been recurringly talked about on this context and which we use in our research pattern: Gamestop, AMC Leisure, Mattress Tub & Past, Blackberry, Specific Inc., Koss, Robinhood, and Vinco. These meme corporations skilled irregular constructive inventory returns across the main brokerages’ announcement that they have been eliminating buying and selling commissions. This discovering means that meme corporations have been nicely positioned to draw retail buyers and benefited from commission-free buying and selling lowering the hurdle these merchants confronted in coming into the inventory market.

Nonetheless, on this prolonged timeframe, we discover no proof that meme buyers confirmed a lot curiosity within the strategy of company voting or in any other case pushed for meme corporations to turn into extra prosocial. Our important proxies in measuring meme buyers’ involvement in company governance are company voting and shareholder proposals. The accounting analysis has usually ascribed non-voting to retail shareholders, since giant institutional buyers exhibit a excessive participation price in voting. We discover that the proportion of non-votes considerably elevated at meme corporations. This enhance in non-voting was extra distinguished in non-routine proposals (proposals, together with director elections, through which brokers can not vote on behalf of the shareholder), the place shareholder apathy is almost certainly to end in a non-vote. The explosion in retail investor curiosity in meme corporations was thus adopted by a lower in shareholder participation within the precise strategy of company voting.

Shareholder proposals are one other believable mechanism for meme buyers to have made their voices heard in company governance—even a solitary shareholder can submit a proposal and have an effect on a gathering agenda. Our evaluation of shareholder proposals at meme corporations, nonetheless, supplies scant help for this notion. Mattress Tub & Past was the one meme agency to incorporate shareholder proposals in its proxy assertion, the doc corporations ship to shareholders with shareholder assembly particulars, between 2015 and 2022. Whereas the proposals did mirror a severe try at influencing company governance, they occurred in 2016 and predated zero-commission buying and selling and the surge of curiosity in meme shares. Broadening our search to shareholder proposals excluded by corporations via the Securities and Change Fee’s no-action course of, through which corporations would possibly ask the Fee to exclude proposals from a shareholder vote, we discover that GameStop excluded three shareholder proposals in 2022. None of those excluded proposals, nonetheless, had any connection to company governance, as an alternative specializing in area of interest points akin to proposing a change within the firm’s switch agent or demanding that administration provide shareholders a non-fungible token (NFT) dividend. Subsequently, shareholders haven’t proven themselves to be obsessed with utilizing the proposal course of at meme corporations.

Regardless of not influencing company processes like voting and proposals, retail buyers in concept might nonetheless form, maybe not directly, company insurance policies towards society. That is particularly believable if one believes that meme buyers usually tend to be millennials and Gen Z and have extra liberal views on social points than older investor cohorts. To empirically take a look at this potential avenue of meme shareholder affect, we study the influence of retail investor inflow on corporations’ ESG scores, obtained from MSCI, utilizing a difference-in-difference evaluation. Surprisingly, slightly than enhancing ESG metrics after the retail investor inflow, meme corporations noticed their scores lower by 39% after 2021. As one other proxy for prosociality, we additionally have a look at board gender variety and discover no proof that meme corporations considerably boosted feminine illustration on their boards in recent times. Total, there appears to be little foundation for the notion that meme buyers, as a result of demographic components like age, are pushing corporations to turn into extra prosocial. Certainly, the outcomes for ESG scores point out that meme corporations might have turn into much less prosocial in recent times.

Lastly, the appearance of meme investing and progress in retail curiosity has coincided with a pointy downturn within the profitability and productive expenditures at meme corporations. We discover that meme corporations have skilled a pointy decline in income in recent times, even after the 2021 meme surge allowed corporations like GameStop and AMC to lift giant sums of cash by promoting inventory at elevated costs (often known as the “at-the-market” choices). Meme corporations don’t appear to have elevated productive expenditures that would improve long-term income: we discover sharp decreases in each analysis and improvement in addition to capital expenditures for these corporations.

The meme inventory phenomenon was a particular democratizing occasion with respect to the rise in participation from retail buyers. Youthful folks with entry to smartphone apps have been in a position to coordinate purchase campaigns and propel chosen corporations’ financials far past what monetary fundamentals would warrant. But our evaluation means that the flood of retail investor exercise at these corporations diminishes to a trickle in the case of these people exerting affect of their function as shareholders. We don’t anticipate future will increase in meme shareholder activism, with the occasions of 2021 receding into the previous and up to date administrative modifications making shareholder proposals tougher to submit. There might thus be a continued disjunction between vigorous meme investing and anemic meme shareholding. Sentiment-based purchase campaigns by retail buyers don’t appear to have translated into sustained retail shareholder participation.

Whereas our paper focuses on a small set of corporations most uncovered to the meme frenzy, we consider zero-commission buying and selling has probably further-reaching penalties for retail buyers’ function in company governance. In an ongoing analysis research, we discover that corporations that skilled irregular constructive returns across the abolition of buying and selling commissions by giant brokerages have been additionally corporations that beforehand had larger retail possession: in different phrases, zero-commission buying and selling appears to have boosted the agency worth for corporations already engaging to retail merchants. Furthermore, we discover a sturdy empirical regularity on this new analysis: every of the consequences we describe in our paper for meme shares (decreased shareholder voting, deteriorated ESG scores, and unchanged board gender variety) additionally holds for the broader array of corporations that exhibited constructive reactions to the elimination of buying and selling commissions in late 2019.