Competition for Flow and Leverage
58 Pages Posted: 5 Nov 2012 Last revised: 31 Jul 2019
Date Written: June 1, 2019
We develop a dual-layered agency model to study blockholder monitoring by activist funds that compete for investor flow. Competition for flow affects the manner in which activist funds govern as blockholders. In particular, funds inflate short-term performance by increasing payouts financed by higher (net) leverage, which subsequently discourages value-creating interventions in economic downturns due to debt overhang. Our theory suggests a new channel via which asset manager incentives may foster economic fragility and links together the observed procyclicality of activist block formation with the documented effect of such funds on the leverage of their target companies.
Keywords: blockholder monitoring, activist hedge funds, competition for flow, corporate governance, delegated portfolio management
JEL Classification: G34, G23
Suggested Citation: Suggested Citation