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.

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 () show that blockholders may engage in both intervention and exit. Levit () shows that the option to exit improves the effectiveness of voice, even if a manager is not concerned about the short‐term 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.…”

Does Institutional Ownership Improve Firm Investment Efficiency?

“…The impact on share prices by institutional selling can influence management decisions (Admati and Pfleiderer, 2009). Even if a manger is not concerned about the short-term stock price, the possibility that institutional investors disagree with the management and decide to exit the position improve the ability of an institutional investor to influence the managers (Levit, 2017). Parrino et al (2003) document that institutional ownership significantly reduced in the year before a forced CEO turnover, which suggests that institutional investors "vote with their feet" when they are dissatisfied with management.…”

Corporate Governance in the Presence of Active and Passive Delegated Investment

“…4 Our paper also studies the interaction between shareholders'trading and activism decisions, but di¤erently from the literature, we focus on shareholders who are delegated asset managers and examine how the competition between funds and the simultaneous presence of active and passive funds a¤ect funds'fees, AUM, investment decisions, and through this, their engagement in governance. Given our interest in these questions, we abstract from more speci…c details of the activism process, such as negotiations with management (Corum, 2020), the role of the board (Cohn and Rajan, 2013), communication (Levit, 2019), pushing for the sale of the …rm (Burkart and Lee, 2019; Corum and Levit, 2019), as well as the interaction between multiple shareholders (e.g., Edmans and Manso, 2011; Brav, Dasgupta, and Mathews, 2019). Dasgupta and Piacentino (2015) and Cvijanovic, Dasgupta, and Zachariadis (2019) also study the governance role of asset managers, but di¤erently from our paper, focus on how governance via exit is a¤ected by their ‡ow-based incentives.…”