The Modern Corporation and Private Property

This paper reviews the theoretical and empirical literature on the role of blockholders (large shareholders) in corporate governance. We start with the underlying property rights of public corporations; we discuss how blockholders are critical in addressing free-rider problems and why, like owners of private property in general, blockholders are likely to be active in firm governance. We then examine what distinguishes a blockholder from an ordinary shareholder and advocate additional definitions from the typical threshold of 5% ownership. We next present new evidence on the frequency and characteristics of blockholders in United States corporations. Then we develop a simple unifying model to present theories of blockholder governance through both voice (direct intervention) and exit (selling one's shares). We survey the empirical evidence on blockholder governance, emphasizing the empirical challenges in identifying causal effects involving blockholders. We highlight the lack of credible instruments for blockholders and argue that exogenous variation should not be a prerequisite for research—a narrow focus on identification may lead to a focus on identifying narrow questions. We emphasize the value of descriptive research with blockholders and how endogeneity concerns can be addressed with economic logic and by directly testing alternative explanations. We close with suggestions for future research.

Blockholders: A Survey of Theory and Evidence

We summarize and synthesize the results from 73 studies that examine the consequences of shareholder activism for targeted firms, and draw two primary conclusions. First, activism that adopts some characteristics of corporate takeovers, especially significant stockholdings, is associated with improvements in share values and firm operations. Activism that is not associated with the formation of ownership blocks is associated with insignificant or very small changes in target firm value. Second, shareholder activism has become more value increasing over time. Research based on shareholder activism from the 1980s and 1990s generally finds few consequential effects, while activism in more recent years is more frequently associated with increased share values and operating performance. These results are consistent with Alchian and Demsetz’ (1972) argument that managerial agency problems are controlled in part by dynamic changes in ownership, and with Alchian’s (1950) observation that business practices adapt over time to mimic successful strategies.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2989923_code17129.pdf?abstractid=2608085&mirid=1&type=2

Thirty Years of Shareholder Activism: A Survey of Empirical Research

https://www.valuewalk.com/wp-content/uploads/2015/07/SSRN-id2608085.pdf

Thirty years of shareholder activism: A survey of empirical research☆

This paper studies informal communications and exit as alternative ways through which investors can influence managers when obtaining control is not feasible or too costly. The first result shows that exit relaxes the tension between investors and managers, and thereby enhances the effectiveness of communications as a form of shareholder activism. The second result shows that public communications are more effective than private communications if and only if managers are concerned about the stock price and their decisions are observed by the market. Overall, the analysis relates the effectiveness of communications to market liquidity; entrenchment and compensation structure of managers; and investors' expertise, investment horizon and ownership size.

/pdf/soft-shareholder-activism-1jr82l7asb.pdf

Soft Shareholder Activism

https://repository.upenn.edu/cgi/viewcontent.cgi?article=1428&context=fnce_papers

Corporate Control Activism

We identify a commitment problem that prevents bidders from unseating resisting and entrenched incumbent directors of target companies through proxy fights. We discuss potential solutions and argue that activist investors are more resilient to this commitment problem and can mitigate the resulting inefficiencies by putting such companies into play. This result holds even if bidders and activists have similar expertise and can use similar techniques to challenge the incumbents, and it is consistent with the evidence that most proxy fights are launched by activists, not by bidders. Moreover, we show that there is complementarity between shareholder activism and takeovers: Activists benefit from the possibility that companies in which they invest will become a takeover target, while bidders, who interpret the presence of an activist as a signal that the target is available for sale, are more likely start takeover negotiations when the target has an activist as a shareholder. Combined, the analysis sheds light on the interaction between M&A and shareholder activism.

/pdf/corporate-control-activism-j97ie3wro2.pdf

We examine the governance role of delegated portfolio managers. In our model, investors decide how to allocate their wealth between passive funds, active funds, and private savings, and fund fees are endogenously determined. Funds' ownership stakes and fees determine their incentives to engage in governance. Whether passive fund growth improves governance depends on whether it crowds out private savings or active funds. In the former case, it improves governance even though it is accompanied by lower fund fees, whereas in the latter case it can be detrimental to governance. Overall, passive fund growth improves governance only if it does not increase fund investors' returns too much. Regulations that decrease funds' costs of engagement can be opposed by both fund investors and fund managers even though they are value-increasing.

/pdf/corporate-governance-in-the-presence-of-active-and-passive-2axthaz0ad.pdf

Adrian Aycan Corum

Papers

Corporate Control Activism

Corporate Control Activism

Corporate Governance in the Presence of Active and Passive Delegated Investment

Governance through Regulation or Market Forces? Fighting Short-Termism under Moral Hazard and Adverse Selection