1.4.2.1 Adverse Effects on Market Efficiency

Recall that one of the mechanisme through which ownership disclosure informs share prices is by creating transparency of economic interests of shareholders. By exposing that the incentives of the shareholder whose voting rights exceed her economic exposure are distorted, transparency allows investors to assess the implications for the value of the share.1 In case of a potential for empty voting, however, the market relies even more heavily on ownership disclosure for information than in case of conventional deviations from one share-one vote. Information on the latter is provided by an array of sources, including company statutes and initial and ongoing issuer disclosure requirements.2 This explains, for example, why the evidence suggests that the extent of private benefit extraction by controlling shareholders in dual-class firms is correctly anticipated; stock returns of such firms are not lower than those of single-class firms.3 These sources, however, will typically fail to inform the market if a wedge between voting rights and cash flow rights is created through market instruments instead of institutional instruments, not for the long term but for the short term, and not by insiders but by outside investors whose voting behavior may nonetheless determine the outcome of the voting process. What is needed in those cases is ad hoc disclosure by shareholders rather than initial or periodic disclosure by issuers. Hence, the pivotal role of the Transparency Directive.