Hedge funds are heavily involved in corporate restructurings. What makes their involvement distinct from other investors is that hedge funds can trade across the securities of a firm, holding either long or short positions in each security. We analyze the choice of a restructuring proposal by a firm’s manager in the presence of a hedge fund as a potential investor in the firm. We show that, under certain market conditions, there is an equilibrium where the firm’s manager makes a proposal for which a hedge fund finds it profitable to short-sell the equity of the firm, buy the debt of the firm, and via its debtholdings lead the firm to a value-reducing outcome to gain on its short equity position. The necessary and sufficient market conditions under which the aforementioned equilibrium occurs are that the debt and equity markets are segregated and that other traders in the equity market are net buyers on average.

We study a noisy rational expectations equilibrium in a multi-asset economy populated by informed and uninformed investors and noise traders. The assets can include state contingent claims such as Arrow–Debreu securities, assets with only positive payoffs, options or other derivative securities. The probabilities of states depend on an aggregate shock, which is observed only by the informed investor. We derive a three-factor CAPM with asymmetric information, establish conditions under which asset prices reveal information about the shock, and show that information asymmetry amplifies the effects of payoff skewness on asset returns. We also find that volatility derivatives make incomplete markets effectively complete, and their prices quantify market illiquidity and shadow value of information to uninformed investors.

The growth of the asset management industry has made it commonplace for firms to have multiple institutional blockholders. In such firms, the strength of governance via exit depends on how blockholders react to each other’s exit. We present a model to show that open-ended institutional investors such as mutual funds react strongly to an informed blockholder’s exit, leading to correlated exits that enhance corporate governance. Our analysis points to a new role for mutual funds in corporate governance. We examine the trades of mutual funds around exits by activist hedge funds to present empirical evidence consistent with our model.

We investigate whether business ties with portfolio firms influence mutual funds' proxy voting using a comprehensive data set spanning 2003 to 2011. In contrast to prior literature, we find that business ties significantly influence promanagement voting at the level of individual pairs of fund families and firms after controlling for Institutional Shareholder Services (ISS) recommendations and holdings. The association is significant only for shareholder‐sponsored proposals and stronger for those that pass or fail by relatively narrow margins. Our findings are consistent with a demand‐driven model of biased voting in which company managers use existing business ties with funds to influence how they vote.