Investor Activism and Financial Market Structure

Abstract

This article investigates investor activism when a number of investors are capable of expending resources to exercise a role in corporate governance. Strategic investors make monitoring decisions and trade in anonymous financial markets with other agents whose trades are motivated by liquidity considerations. In this setting, a core group of monitoring investors emerges endogenously to curtail managerial opportunism. These core activist investors pursue activist policies and engage in heavy trading on both the buy and the sell sides of the market. In addition, a fringe group of monitoring investors, who are somewhat active and trade only on the buy side, may emerge. Although the smallest investors are passive, there is no monotonic relationship between shareholdings and activism. In fact, among those investors who choose to monitor with positive probability, those with smaller holdings are the most active. In addition to characterizing the emergence of monitoring activity in the presence of numerous potential activist investors, we also develop some comparative statics. Some of these comparative statics are counterintuitive from the perspective of models that fail to endogenize both security market structure and investor activism. For example, it is shown that increasing the size of the shareholdings controlled by informed, strategic investors may reduce bid-ask spreads.I would like to thank seminar participants at 1999 European Finance Meetings, Carnegie Mellon University, the University of Pittsburgh, Rice, the University of Texas, and the University of Texas at Dallas for helpful comments. I am also especially grateful to Laura Starks, Ernst Maug, and an anonymous referee, and the editor, Michael Fishman, for detailed comments on earlier drafts of this paper. The usual disclaimer applies.

Corporate Governance and Voluntary Disclosure of Interim Financial Reporting in Jordan

“…However, Fama and Jensen (1983) claimed that when ownership is dispersed, it may cause conflicts between the principal and the agent. Thus, in order to ease this problem, the primary shareholders should take part in the monitoring and supervising of activities that could potentially cause the aforementioned problems, so that the agency problems could be reduced (Shleifer&Vishny, 1986;Huddart, 1993;Noe, 2002). Therefore, managers are expected to disclose more information in annual reports as a way to reduce the agency costs from the monitoring activities.…”

Institutional Ownership Heterogeneity and Firm Performance: Evidence from Malaysia

“…Various individual, institution, Government, foreign and managerial ownership are the example of ownership type. Ownership concentration, on the other hand, is one of the ways that ownership could limit agency problem through large shareholdings (Shleifer & Vishny, 1986Noe, 2002). Cornet et al (2003) in their study of S&P 100 companies between 1993 and 2000 find positive and significant relationship between the firm's operating profit and percent of institutional investors ownership as well as with the number of institutional investors.…”

Liquidity and Governance

“…The literature on monitoring by blockholders also includes a small subset of papers that study trading by the blockholder, including Huddart (1993), Admati et al (1994), Kahn and Winton (1998), Maug (1998), Stoughton andZechner (1998), andNoe (2002). However, each of these papers assumes a single round of trading, which makes it impossible to study any feedback from market prices to the trading and monitoring activities of blockholders.…”