Social psychology research suggests that management groups under greater external pressure are more prone to groupthink (i.e., a tendency to reach premature consensus), leading to greater performance volatility. To isolate the group dynamics channel, we focus on the pressure management faces from largely uninformed and dissatisfied non-blockholders. Consistent with the groupthink view, we find that non-blockholder dissatisfaction is positively associated with performance volatility, which is further corroborated by tests addressing omitted variable bias and reverse causality. In addition, the baseline relationship is stronger in firms with greater interaction among directors, more powerful CEOs, and less diverse boards. Our findings suggest that non-blockholder dissatisfaction heightens performance volatility by exacerbating groupthink.

Finance theory suggests that the privileged information that traditional banks obtain about borrowers through monitoring creates opportunities for banks to impose informational hold-up costs on such borrowers. Because a surge in borrower risk increases banks’ hold-up power, banks with information monopoly should be able to increase their rates beyond the level explained by borrower risk alone. We test this theory using the setting of activist short sellers’ public allegations—a setting that increases borrower risk and restricts borrower access to public financing sources—and find, on average, that, after controlling for both ex ante and ex post changes in borrower credit risk, banks increase loan pricing following activist short sellers’ allegations. Our loan pricing results not explained by changes in borrower credit risk are consistent with banks extorting borrowers during times of adversity.