Blockholder Compensation, Activism, and Efficacy

Abstract:     
We examine the relation between blockholder presence and firm performance with a focus on the inherent differences in organizational form and the stated intent among large shareholders. Using hand-collected information on blockholdings for a panel of S&P 1500 firms, we find that firms targeted by blockholders with organizational forms typically associated with performance-sensitive compensation or who file as active experience subsequent improvements in operating and stock price performance. Controlling for the endogeneity of blockholder presence and type, we observe no such improvements for firms targeted by blockholders with weaker compensation incentives or those taking a passive role. Moreover, performance effects are stronger for firms where information asymmetries are more pronounced and for firms with better corporate governance, indicating that, while outside blockholders may serve as a substitute for other monitoring mechanisms, it does not appear that they can fully compensate for shortcomings in governance.

Number of Pages in PDF File: 47

working papers series