On the Scope of the Stockholder Unanimity Theorems

Abstract

If a firm is owned by several stockholders each of whom has different risk preferences, then whose risk preferences determine whether the firm accepts or rejects a risky, proposed change in its production plan? It might appear that this is a political problem whose resolution is necessarily through political means such as proxy fights. This appearance, however, is only partially accurate. Arrow [1964], Ekern [1973], Ekern and Wilson [1974], Leland [1973, 1978], Baron [1977], and others have developed a theory showing that if a sufficient variety of securities are traded on the stock market, then conflict among stockholders does not occur. The reason is that if an economy has enough different securities, then in equilibrium each stockholder's preferences towards risk is aligned with every other stockholder's preferences. Consequently stockholders are unanimous in their evaluations of risky investment projects. The purpose of this paper is to inquire if any reason exists why one should