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Manchester Grand Hyatt, Seaport B
American Finance Association
Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Nadya Malenko, Boston College
The Wall Street Stampede: Exit as Governance with Interacting Blockholders
AbstractIn firms with multiple blockholders governance via exit is affected by how blockholders react to each others' exit. Institutional investors, who hold the majority of equity blocks, are heterogeneous in their incentives. How do these incentives affect the manner in which institutional blockholders respond to each others' exit? We present a model that shows that open-ended institutional investors, who are subject to investor redemption risk, will be sensitive to an informed blockholder's exit, giving rise to correlated exits and strengthening governance. Thus, exposure to redemption risk, universally a negative force in asset pricing, plays a positive role in corporate governance. Using data on engagement campaigns by activist hedge funds we present large-sample evidence consistent with our theoretical mechanism.
AbstractRecently, activist investors have been reaching settlements with boards more often than they have been challenging boards in a proxy fight. In this paper, I provide a theoretical framework to study the economics of these settlements. The activist can demand that his proposal be implemented right away ("action settlement") or demand a number of board seats ("board settlement"), which also gives the activist access to better information. I find that the incumbent's rejection of board settlement reflects more of its private information than the rejection of action settlement does. Therefore, demanding board settlement increases the activist's credibility to run a proxy fight upon rejection and leads to a higher likelihood of reaching a settlement in the first place. Consistently with the empirical evidence by Bebchuk, Brav, Jiang, and Keusch (forthcoming), the likelihood of board (action) settlement increases (decreases) with information asymmetry. Moreover, while the average ex-post shareholder value upon reaching board settlement is lower than upon reaching action settlement, the ex-ante value created by demanding board settlement can be higher. Finally, even though value-destroying projects are typically not implemented following settlements, the existence of settlements may nevertheless destroy shareholder value due to the free-rider problem. However, strikingly, making activism less costly can actually further exacerbate this problem.
University of Pennsylvania
University of Texas-Austin
- G3 - Corporate Finance and Governance