Expectations that the “meme stock” phenomenon would result in companies becoming more socially responsible and responsive to investors have not matched reality, according to new research from Professor Albert Choi.

Choi and his co-authors—Dhruv Aggarwal and Yoon-Ho Alex Lee, both of Northwestern University—studied eight companies targeted as “meme stocks,” where a grassroots social media campaign brings in new retail investors and inflates the price of an otherwise unremarkable company’s shares. Contrary to many analysts’ expectations, the researchers found that targeted companies actually became less responsive to shareholders and less likely to adopt progressive reforms in corporate governance. 

Choi, the Paul G. Kauper Professor of Law, recently answered five questions about the research:

1. Social media alone often gets credit or blame for the meme stock phenomenon, but you identified other important causes. What were they?

Ever since the Robinhood stock-trading app became popular, their zero-commission trading model enticed a lot of retail investors to start buying and selling stock. In October 2019, in response to Robinhood’s rise in market share, major brokerages established their own zero-commission platforms. Since then, the data shows that the number of retail investors investing in stock has substantially increased. That was the first important change.

Second, of course, was social media. We’ve always had bubbles and crashes in the past, but this kind of coordinated buying and selling that has been promoted through social media created its own dynamic. 

The third change, somewhat related to the first one, is a gamification of investing. Now you can just open a trading app and buy and sell stock on your cell phone, again without paying any commission. That combination of forces made the meme stock frenzy possible. We’re going to see these episodes going forward as long as we have these structural elements in place.

2. What makes particular companies attractive to this phenomenon?

It’s an interesting puzzle, and I think there are different reasons. GameStop had a failing business model because they were losing revenue to online competitors like Amazon. And then it was discovered in late 2020 that some Wall Street hedge funds took short positions against GameStop, basically betting that the stock price would fall even further. When that got revealed through social media, a lot of retail stockholders got together to try to go against the hedge funds. 

With other meme-stock companies, like Bed Bath and Beyond or AMC Entertainment, it might be some kind of nostalgia. People may have simply wanted to save these companies from going under.

Small banks have been another meme-stock target, and I don’t know about those. I think there’s a large amount of randomness associated with becoming a meme stock. No one story seems to fit all these different kinds of meme-stock companies.

3. It was natural to expect that this influx of retail investors might change how the target companies operated. What was expected?

When a lot of the retail stockholders come in, that’s going to drive out a lot of small institutional shareholders—such as small or medium-sized hedge funds. The retail stockholders get rights as “owners” of the company, such as the right to vote in shareholder meetings, to make proposals, and so on. Some academics and practitioners expected that as more retail shareholders came in, they would take away power from the institutional shareholders and democratize governance at these firms. 

There was also a thought that maybe the new retail investors—especially given that many are millennials and Gen Z—would put direct and indirect pressure on the companies to improve their records on social and environmental issues.

4. What did you find actually happened?

These new retail shareholders just don’t seem to be engaging with the company at the operational level. They seem to have an effect that’s almost opposite of expectations. The existing institutional shareholders who didn’t sell out are possibly gaining even more power, because the new shareholders are so passive.

One of the best ways to measure this is by looking at the share of non-votes in shareholder meetings. Shareholders can vote in favor, against, abstain, or not vote at all on various governance issues, including electing new directors. We looked at the period from 2015 to 2022. Around 2015, at the meme-stock companies, the share of non-votes was less than 20 percent. It started creeping up in 2019, and we attribute that to the wide introduction of zero-commission trading. And it kept going up. By the time we got to 2022, almost one year and a half after the meme stock frenzy of early 2021, the share of non-votes was more than 50 percent.

Shareholder proposals are another way to measure this. There were no shareholder proposals whatsoever, across the board. 

Then we looked at different indirect measures. We tried to figure out whether any indirect influence, for instance, via social media, would actually show up in the data. On board independence, on gender diversity, on environmental and social issues—basically across the board, all the indices seem to be getting worse or at least not getting better.

5. Why didn’t the expectations for reformed corporate governance pan out?

I think this is largely due to retail shareholders’ passivity. They just don’t seem to care. They’re not voting. At the same time, many of them are staying with the company, which is really interesting. I don’t know why they still own the stock. 

We are currently in the process of enlarging the study to all publicly traded companies, to see how the changing shareholder base is affecting their corporate governance. So far, our findings are pretty consistent with what we found with meme-stock companies. I think there’s going to be a lot more we can say about the traditional ideas on whether institutional or retail shareholders are better at influencing corporate behavior.