Many financial commentators thought that the surge of retail investors participating in the stock market, the most notable of whom boosted “meme stocks” like GameStop, would democratize corporate governance and improve prosocial firm behavior, including the promotion of environmental, social, and governance (ESG) goals. In new research, Dhruv Aggarwal, Albert H. Choi, and Yoon-Ho Alex Lee find evidence that the exact opposite took place.

In recent years, United States stock markets have witnessed  a surge in participation from retail investors. According to Bloomberg Intelligence, in the first six months of 2020, retail investors were responsible for nearly 20% of all stock trades, nearly double their share in 2010. Starting in 2021, in particular, online communities, consisting predominantly of millennial and Gen Z investors, organized on the social media platform Reddit and engaged in coordinated campaigns to purchase shares of companies such as AMC and GameStop. The popularity of these stocks appeared divorced from their financial fundamentals, and they became known as “meme stocks.” The title of a recent major Hollywood film on meme investing, Dumb Money, indicates how many pundits viewed the phenomenon and its participants.

The initial logic driving the campaigns was the belief that hedge funds were taking advantage of these companies’ dire financial situations and ruthlessly shorting, or betting against, these meme stocks, thus suppressing their prices. These Reddit communities sought to pressure the hedge funds to unwind their short positions. But as the share prices of these firms reached stratospheric levels, commentators speculated that meme investors (and retail investors, more generally) might disrupt the influence of institutional investors in another way by asserting their voices in the boardroom. Specifically, these commentators thought the flood of new retail investors might  nudge companies to adopt the more prosocial environmental, social, and governance (ESG) policies favored by younger generations. In a forthcoming publication, titled “Meme Corporate Governance,” we empirically assess whether meme investors had a tangible effect on corporate governance at firms like AMC and GameStop. We find that they did not.

First, our analysis questions the conventional wisdom that the meme stock phenomenon originated on Reddit boards in 2021 and instead traces it further back in time to the abolition of trading commissions by major online brokerages in October 2019. The established brokerages stopped charging commissions at this time to stem their loss of market share to Robinhood, the app that  pioneered commission-free trading. We classify companies as meme stock companies based on the consensus formed among the media and academic commentary. We find eight companies that were recurringly mentioned in this context and which we use in our study sample: Gamestop, AMC Entertainment, Bed Bath & Beyond, Blackberry, Express Inc., Koss, Robinhood, and Vinco. These meme companies experienced abnormal positive stock returns around the major brokerages’ announcement that they were eliminating trading commissions. This finding suggests that meme firms were well positioned to attract retail investors and benefited from commission-free trading reducing the hurdle these traders faced in entering the stock market.

Still, in this extended timeframe, we find no evidence that meme investors showed much interest in the process of corporate voting or otherwise pushed for meme firms to become more prosocial. Our main proxies in measuring meme investors’ involvement in corporate governance are corporate voting and shareholder proposals. The accounting research has typically ascribed non-voting to retail shareholders, since large institutional investors exhibit a high participation rate in voting. We find that the proportion of non-votes significantly increased at meme companies. This increase in non-voting was more prominent in non-routine proposals (proposals, including director elections, in which brokers cannot vote on behalf of the shareholder), where shareholder apathy is most likely to result in a non-vote. The explosion in retail investor interest in meme firms was thus followed by a decrease in shareholder participation in the actual process of corporate voting.

Shareholder proposals are another plausible mechanism for meme investors to have made their voices heard in corporate governance—even a solitary shareholder can submit a proposal and affect a meeting agenda. Our analysis of shareholder proposals at meme firms, however, provides scant support for this notion. Bed Bath & Beyond was the only meme firm to include shareholder proposals in its proxy statement, the document firms send to shareholders with shareholder meeting details, between 2015 and 2022. While the proposals did reflect a serious attempt at influencing corporate governance, they occurred in 2016 and predated zero-commission trading and the surge of interest in meme stocks. Broadening our search to shareholder proposals excluded by firms through the Securities and Exchange Commission’s no-action process, in which firms might ask the Commission to exclude proposals from a shareholder vote, we find that GameStop excluded three shareholder proposals in 2022. None of these excluded proposals, however, had any connection to corporate governance, instead focusing on niche issues such as proposing a change in the company’s transfer agent or demanding that management offer shareholders a non-fungible token (NFT) dividend. Therefore, shareholders have not shown themselves to be enthusiastic about using the proposal process at meme firms.

Despite not influencing corporate processes like voting and proposals, retail investors in theory could still shape, perhaps indirectly, corporate policies toward society. This is especially plausible if one believes that meme investors are more likely to be millennials and Gen Z and have more liberal views on social issues than older investor cohorts. To empirically test this potential avenue of meme shareholder influence, we examine the impact of retail investor influx on companies’ ESG scores, obtained from MSCI, using a difference-in-difference analysis. Surprisingly, rather than improving ESG metrics after the retail investor influx, meme companies saw their scores decrease by 39% after 2021. As another proxy for prosociality, we also look at board gender diversity and find no evidence that meme companies significantly boosted female representation on their boards in recent years. Overall, there seems to be little basis for the notion that meme investors, due to demographic factors like age, are pushing firms to become more prosocial. Indeed, the results for ESG scores indicate that meme companies may have become less prosocial in recent years.

Finally, the advent of meme investing and growth in retail interest has coincided with a sharp downturn in the profitability and productive expenditures at meme companies. We find that meme companies have experienced a sharp decline in profits in recent years, even after the 2021 meme surge allowed companies like GameStop and AMC to raise large sums of money by selling stock at elevated prices (known as the “at-the-market” offerings). Meme companies do not seem to have increased productive expenditures that could enhance long-term profits: we find sharp decreases in both research and development as well as capital expenditures for these companies.

The meme stock phenomenon was a distinctive democratizing event with respect to the increase in participation from retail investors. Younger people with access to smartphone apps were able to coordinate buy campaigns and propel selected firms’ financials far beyond what financial fundamentals would warrant. Yet our analysis suggests that the flood of retail investor activity at these companies diminishes to a trickle when it comes to these individuals exerting influence in their role as shareholders. We do not anticipate future increases in meme shareholder activism, with the events of 2021 receding into the past and recent administrative changes making shareholder proposals harder to submit. There could thus be a continued disjunction between vigorous meme investing and anemic meme shareholding. Sentiment-based buy campaigns by retail investors do not seem to have translated into sustained retail shareholder participation.

While our paper focuses on a small set of firms most exposed to the meme frenzy, we believe zero-commission trading has potentially further-reaching consequences for retail investors’ role in corporate governance. In an ongoing research study, we find that firms that experienced abnormal positive returns around the abolition of trading commissions by large brokerages were also companies that previously had higher retail ownership: in other words, zero-commission trading seems to have boosted the firm value for companies already attractive to retail traders. Moreover, we find a strong empirical regularity in this new research: each of the effects we describe in our paper for meme stocks (decreased shareholder voting, deteriorated ESG scores, and unchanged board gender diversity) also holds for the broader array of companies that exhibited positive reactions to the elimination of trading commissions in late 2019.

Further research and commentary on the retail investor phenomenon should therefore center its origins in the 2019 advent of zero-commission trading, acknowledge its limited impact on shareholder participation, and engage with the possibility that this new age of retail investing pertains to far more companies than AMC and GameStop. We may still find, though, that there is scant evidence for the democratizing and prosocial benefits many hoped the surge in retail investment would bring.

Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.

For more on GameStop, revisit our Capitalisn’t episode below: