Soft Shareholder Activism

Abstract

This paper studies communications between investors and firms as a form of corporate governance. The main premise is that activist investors cannot force their ideas on companies; they must persuade the board or other shareholders that implementing these ideas is in the best interest of the firm. In this framework, I show that voice (launching a public campaign) and exit (selling shares) enhance the ability of activists to govern through communication. The analysis identifies the factors that contribute to successful dialogues between investors and firms. It also shows that public communications are likely to be ineffective, justifying the prevalence of behind-the-scenes communications. Abstract This paper studies communications between investors and …rms as a form of corporate governance. The main premise is that activist investors cannot force their ideas on companies; they must persuade the board or other shareholders that implementing these ideas is in the best interest of the …rm. In this framework, I show that voice (launching a public campaign) and exit (selling shares) enhance the ability of activists to govern through communication. The analysis identi…es the factors that contribute to successful dialogues between investors and …rms. It also shows that public communications are likely to be ine¤ective, justifying the prevalence of behind-the-scenes communications.

Behind the Scenes: The Corporate Governance Preferences of Institutional Investors

“…For example, the buyout of Dell caused a number of institutional investors to publicly criticize the transaction and to take legal action . The overall observation that investors prefer private negotiations to public engagement is consistent with recent theoretical evidence in Levit (). In his model, if an activist's information becomes public, the activist loses credibility and the ability to influence the manager's actions.…”

“…For example, Edmans and Manso (2011) show that blockholders may engage in both intervention and exit. Levit (2014) shows that the option to exit improves the effectiveness of voice, even if a manager is not concerned about the shortterm stock price. In his model, exit and voice are complements because the possibility of exiting improves the ability of an activist to influence the manager.…”

Institutional Investors and Corporate Environmental, Social, and Governance Policies: Evidence from Toxics Release Data

“…18 One reason behind the preference for the behind-the-scenes engagement is that it is more effective in instigating change than the more public forms such as publicly criticizing a firm or taking legal action. This rationale is consistent with the survey evidence in McCahery et al (2016) and the theoretical model by Levit (2014) who shows that if an activist's information becomes public, the activist loses credibility and the ability to influence the manager's actions. Additionally, this tactic appears to have been gaining popularity in recent years.…”

The Wall Street Walk when Blockholders Compete for Flows

“…In addition to Admati and Pfleiderer (2009) and Edmans (2009), this literature includes Edmans and Manso (2011), who consider the trade-off between voice and exit and solve for the number of blockholders that maximizes firm value. In recent work, Levit (2014) shows that voice and exit can be complementary because the option to exit enhances the efficacy of communication between the informed blockholder and the firm's manager. In contrast to these papers, which treat the blockholder as a principal, we focus on the delegated nature of blockholding.…”