IDEAS home Printed from https://ideas.repec.org/a/eee/jfinec/v107y2013i3p610-631.html
   My bibliography  Save this article

The costs of shareholder activism: Evidence from a sequential decision model

Author

Listed:
  • Gantchev, Nickolay

Abstract

This paper provides benchmarks for monitoring costs and evaluates the net returns to shareholder activism. I model activism as a sequential decision process consisting of demand negotiations, board representation, and proxy contest and estimate the costs of each activism stage. A campaign ending in a proxy fight has average costs of $10.71 million. I find that the estimated monitoring costs reduce activist returns by more than two-thirds. The mean net activist return is close to zero but the top quartile of activists earns higher returns on their activist holdings than on their non-activist investments. The large-sample evidence presented in this paper aids in understanding the nature and evolution of activist engagements.

Suggested Citation

  • Gantchev, Nickolay, 2013. "The costs of shareholder activism: Evidence from a sequential decision model," Journal of Financial Economics, Elsevier, vol. 107(3), pages 610-631.
    • Handle: RePEc:eee:jfinec:v:107:y:2013:i:3:p:610-631
    DOI: 10.1016/j.jfineco.2012.09.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X12001924
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jfineco.2012.09.007?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lauren Cohen & Breno Schmidt, 2009. "Attracting Flows by Attracting Big Clients," Journal of Finance, American Finance Association, vol. 64(5), pages 2125-2151, October.
    2. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    3. Del Guercio, Diane, 1996. "The distorting effect of the prudent-man laws on institutional equity investments," Journal of Financial Economics, Elsevier, vol. 40(1), pages 31-62, January.
    4. Hennessy, Christopher A. & Levy, Amnon & Whited, Toni M., 2007. "Testing Q theory with financing frictions," Journal of Financial Economics, Elsevier, vol. 83(3), pages 691-717, March.
    5. Daniel, Kent, et al, 1997. "Measuring Mutual Fund Performance with Characteristic-Based Benchmarks," Journal of Finance, American Finance Association, vol. 52(3), pages 1035-1058, July.
    6. Davis, Gerald F. & Kim, E. Han, 2007. "Business ties and proxy voting by mutual funds," Journal of Financial Economics, Elsevier, vol. 85(2), pages 552-570, August.
    7. Zvi Eckstein & Kenneth I. Wolpin, 1989. "The Specification and Estimation of Dynamic Stochastic Discrete Choice Models: A Survey," Journal of Human Resources, University of Wisconsin Press, vol. 24(4), pages 562-598.
    8. Powell, James L., 1984. "Least absolute deviations estimation for the censored regression model," Journal of Econometrics, Elsevier, vol. 25(3), pages 303-325, July.
    9. Alon Brav & Wei Jiang & Frank Partnoy & Randall Thomas, 2008. "Hedge Fund Activism, Corporate Governance, and Firm Performance," Journal of Finance, American Finance Association, vol. 63(4), pages 1729-1775, August.
    10. Admati, Anat R & Pfleiderer, Paul & Zechner, Josef, 1994. "Large Shareholder Activism, Risk Sharing, and Financial Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1097-1130, December.
    11. Jean Tirole, 2006. "The Theory of Corporate Finance," Post-Print hal-00173191, HAL.
    12. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521747387, September.
    13. Marco Becht & Julian Franks & Colin Mayer & Stefano Rossi, 2008. "Returns to Shareholder Activism," OFRC Working Papers Series 2008fe07, Oxford Financial Research Centre.
    14. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
    15. repec:bla:jfinan:v:53:y:1998:i:1:p:99-129 is not listed on IDEAS
    16. John M. Griffin & Jin Xu, 2009. "How Smart Are the Smart Guys? A Unique View from Hedge Fund Stock Holdings," The Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2331-2370, July.
    17. Alex Edmans & Gustavo Manso, 2011. "Governance Through Trading and Intervention: A Theory of Multiple Blockholders," The Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2395-2428.
    18. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
    19. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
    20. David Yermack, 2010. "Shareholder Voting and Corporate Governance," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 103-125, December.
    21. Clifford, Christopher P., 2008. "Value creation or destruction? Hedge funds as shareholder activists," Journal of Corporate Finance, Elsevier, vol. 14(4), pages 323-336, September.
    22. Stuart L. Gillan & Laura T. Starks, 2007. "The Evolution of Shareholder Activism in the United States," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(1), pages 55-73, January.
    23. Greenwood, Robin & Schor, Michael, 2009. "Investor activism and takeovers," Journal of Financial Economics, Elsevier, vol. 92(3), pages 362-375, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Edmans, Alex & Holderness, Clifford, 2016. "Blockholders: A Survey of Theory and Evidence," CEPR Discussion Papers 11442, C.E.P.R. Discussion Papers.
    2. Dasgupta, Amil & Fos, Vyacheslav & Sautner, Zacharias, 2021. "Institutional investors and corporate governance," LSE Research Online Documents on Economics 112114, London School of Economics and Political Science, LSE Library.
    3. Alex Edmans, 2014. "Blockholders and Corporate Governance," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 23-50, December.
    4. Wolfgang Bessler & Wolfgang Drobetz & Julian Holler, 2015. "The Returns to Hedge Fund Activism in Germany," European Financial Management, European Financial Management Association, vol. 21(1), pages 106-147, January.
    5. Yangyang Chen & Rui Ge & Henock Louis & Leon Zolotoy, 2019. "Stock liquidity and corporate tax avoidance," Review of Accounting Studies, Springer, vol. 24(1), pages 309-340, March.
    6. Alex Edmans & Vivian W. Fang & Emanuel Zur, 2013. "The Effect of Liquidity on Governance," The Review of Financial Studies, Society for Financial Studies, vol. 26(6), pages 1443-1482.
    7. Mark Mietzner & Denis Schweizer, 2014. "Hedge funds versus private equity funds as shareholder activists in Germany — differences in value creation," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(2), pages 181-208, April.
    8. Dasgupta, Amil & Piacentino, Giorgia, 2015. "The Wall Street walk when blockholders compete for flows," LSE Research Online Documents on Economics 63144, London School of Economics and Political Science, LSE Library.
    9. Jing Huang & Steven R. Matsunaga & Z. Jay Wang, 2020. "The Role of Pension Business Benefits in Institutional Block Ownership and Corporate Governance," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 1959-1989, December.
    10. Ben Arfa, Nouha & Karmani, Majdi & Labaronne, Daniel, 2017. "Antecedents of hedge fund activism in French listed target firms," Research in International Business and Finance, Elsevier, vol. 42(C), pages 1315-1326.
    11. Travis L. Johnson & Nathan Swem, 2017. "Reputation and Investor Activism: A Structural Approach," Finance and Economics Discussion Series 2017-036r1, Board of Governors of the Federal Reserve System (U.S.), revised 15 Oct 2020.
    12. Amil Dasgupta & Giorgia Piacentino, 2011. "The Wall Street Walk when Blockholders Compete for Flows," FMG Discussion Papers dp692, Financial Markets Group.
    13. Lucian A. Bebchuk & Michael S. Weisbach, 2012. "The State of Corporate Governance Research," Springer Books, in: Sabri Boubaker & Bang Dang Nguyen & Duc Khuong Nguyen (ed.), Corporate Governance, edition 127, pages 325-346, Springer.
    14. Nicole Boyson & Robert Mooradian, 2011. "Corporate governance and hedge fund activism," Review of Derivatives Research, Springer, vol. 14(2), pages 169-204, July.
    15. Helwege, Jean & Intintoli, Vincent J. & Zhang, Andrew, 2012. "Voting with their feet or activism? Institutional investors’ impact on CEO turnover," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 22-37.
    16. Mike Burkart & Samuel Lee, 2022. "Activism and Takeovers," The Review of Financial Studies, Society for Financial Studies, vol. 35(4), pages 1868-1896.
    17. Boyson, Nicole M. & Gantchev, Nickolay & Shivdasani, Anil, 2017. "Activism mergers," Journal of Financial Economics, Elsevier, vol. 126(1), pages 54-73.
    18. Richard Chung & Scott Fung & Szu-Yin Hung, 2012. "Institutional Investors and Firm Efficiency of Real Estate Investment Trusts," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 171-211, June.
    19. Amil Dasgupta & Konstantinos Zachariadis, 2011. "Delegated Activism and Disclosure," FMG Discussion Papers dp689, Financial Markets Group.
    20. Barbara Voußem & Utz Schäffer & Denis Schweizer, 2015. "Top management turnover under the influence of activist investors," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 19(3), pages 709-739, August.

    More about this item

    Keywords

    Shareholder activism; Hedge funds; Institutional investors; Monitoring; Corporate governance;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:107:y:2013:i:3:p:610-631. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.