Download This PaperActivists' Intervention Target Selection Based on Performance and Governance Information
61 Pages Posted: 29 Apr 2020 Last revised: 3 Apr 2024
Date Written: September 03, 2024
Abstract
Are active investors more likely to target poorly or well performing firms? Prior empirical and theoretical studies provide mixed answers. I study an activist's intervention target selection in a setting in which firms' governance quality arises endogenously. In this setting, prior performance is informative not only about future cash flows but also about governance quality. Trading off the two inferences, the activist targets intermediately performing firms, implying a nonmonotonic performance-activism relation. The average prior target firm performance can further be positive or negative depending on the activist's intervention costs. In addition, I study improvements in the governance information environment resulting either from mandating more governance-related corporate disclosures or from the availability of commercial governance ratings by third-party providers. Improving governance transparency can weaken the disciplinary effect of shareholder activism on firms' internal governance with detrimental effects for shareholder value.
Keywords: shareholder activism, governance quality, governance information., information performance, agency cost hypothesis
JEL Classification: G23, G32, G34, G38, M41, M48
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