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Shareholder Activism

Paper Session

Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)

Manchester Grand Hyatt, Seaport B
Hosted By: American Finance Association
  • Chair: Nadya Malenko, Boston College

Corporate Governance Through Voice and Exit

Marco Becht
Free University of Brussels
Julian Franks
London Business School
Hannes Wagner
Bocconi University


How do active managers engage with their portfolio firms? And what role does governance and engagement play in their trading decisions? We use proprietary data from one of the world’s largest active asset managers to answer these questions. Our sample, based upon up to twelve years of data, provides a detailed picture of how fund managers’ decisions are influenced by engagement with target firms exploiting three distinct channels: private discussions with board and management, internal warning flags for firms with poor governance, and votes cast against management. We find that fund managers’ trades are influenced by governance engagements, leading either to (partial) exit, or to larger bets on favourable engagements. Trades are associated with significant abnormal returns, arising from exit decisions that avoid subsequent underperformance, while larger bets are placed on outperforming stocks. Our results provide strong support for the view that engagement with target firms influences trading decisions and provides a significant contribution to performance.

The Wall Street Stampede: Exit as Governance with Interacting Blockholders

Dragana Cvijanovic
University of Warwick
Amil Dasgupta
London School of Economics
Konstantinos Zachariadis
Queen Mary University of London


In 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.

Activist Settlements

Adrian Aycan Corum
Cornell University


Recently, 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.
Michelle Lowry
Drexel University
Doron Levit
University of Pennsylvania
Jonathan Cohn
University of Texas-Austin
JEL Classifications
  • G3 - Corporate Finance and Governance